When I think of utility stocks, I hear the sound of a cash register, but the man behind the counter fast asleep because he’s so bored. Because of their business, utilities are able to provide significant dividends, but the excitement of growth is just not there. However, one company that flips the boring aspect of utilities on its head is Fortis Inc. (TSX:FTS), one of the largest utility companies in North America.
Typically, a utility works in the market where it exists and doesn’t really expand beyond that. It might upgrade its facilities to become more efficient, but for the most part it generates electricity, gets paid, and then distributes dividends. Fortis, though, has been focusing on expanding into other parts of North America through acquisitions. And it’s been doing a very good job at that.
Back in 2013 UNS Energy in Arizona was acquired by Fortis for US$4.5 billion. This acquisition gave the company access to an additional 654,000 electric and gas customers. Despite what we may wish, it’s virtually impossible to switch your energy provider, so that acquisition gave Fortis a serious moat in the region.
Deciding that the acquisition wasn’t enough growth, Fortis doubled down. It announced in the beginning of the year that it would be buying ITC Holdings Corp. for US$11.3 billion. This is the largest pure-play transmission company in the United States with high-voltage transmission facilities in Oklahoma, Kansas, Illinois, Michigan, Missouri, Iowa, and Minnesota. The 15,600 miles of transmission line can support 26,000 megawatts of peak load.
On June 22, ITC shareholders approved the acquisition. Management expects that this deal with provide a 5% accretion to earnings in the very first year.
What I hope has become crystal clear is that Fortis is a growth play. But in my headline I also said that it was an income play.
When it comes to receiving dividends, it’s important that the company is able to pay consistently, that the dividend is secure, and–if the company is growing–that there are increases to the distribution. Fortis satisfies all three of these qualities.
It currently pays a 3.5% yield, which comes out to $0.375 per quarter. Investors can expect this consistent payment because of the secure nature of the company’s earnings. The vast majority of its cash flow comes from regulated assets. Since it knows what to expect, the company is able to pay a dividend each quarter without worry.
But since Fortis is a growth stock, the dividend should follow along. And it does. For 43 years, Fortis has seen the dividend increase at least once annually. If investors have held on since the 70s, they would have received at least 43 pay raises for being an investor in this company.
Between now and 2020, management wants the dividend to increase by 6% every single year, and in September 2015 management increased it by 10.3%. At the very least, investors should expect that their earnings will continue to rise. And if management is right that the first year of the ITC Holdings deal will result in 5% accredited earnings, the dividend is, in my opinion, more than safe.
Utilities may be boring, but Fortis flips the script. If you want growth and dividends, this stock is definitely a good choice.
