Regulated electric utility Fortis Inc. (TSX:FTS) continues to garner headlines for all of the right reasons. With its share price down by almost 4% over the last month, now is the time to add this impressive company to your portfolio. It may not be the most exciting stock, but it offers investors an enviable history of unlocking value through accretive acquisitions. When coupled with a range of other characteristics, this makes it the ideal stock for every portfolio.
Now what?
Firstly, the majority of Fortis’s earnings are virtually assured.
You see, the majority of its earnings are generated from regulated gas and electric utilities, which means they are highly predictable. By virtue of their regulated nature, payments for the provision of services are regularly adjusted to reflect higher costs and inflation, ensuring that Fortis is able to recover costs incurred and remain profitable.
Fortis’s earnings and cash flows are assured when this is coupled with the utility industry’s steep barriers to entry and the inelastic demand for electricity.
Secondly, Fortis continues to expand through a well-executed growth strategy.
The certainty of its cash flows has allowed Fortis to progressively expand its business through a series of accretive acquisitions. Over the last three years it has completed two major utility acquisitions. The first of these was CH Energy Group Inc. for US$1.5 billion in 2013, followed by UNS Energy Corp. in 2014 for US$2.5 billion.
These deals gave Fortis a solid operational footprint in the U.S., which is one of the largest energy markets globally. They also gave Fortis’s earnings a healthy bump and left it well positioned to benefit from the U.S. economic recovery that is underway. Combined with its growing population, this will cause the demand for electricity and natural gas to rise.
Fortis is on track to finish another accretive acquisition–the recently approved purchase of the largest U.S. regulated electric transmission utility ITC Holdings Corp.–for US$11.3 billion. On completion, it will add a further eight states to its U.S. operational footprint, which will further diversify its assets and earnings. It will also cause the majority of Fortis’s revenues to come from the U.S. and give its bottom line a healthy bump.
This will further support Fortis’s stated goal of growing its dividend by 6% annually by 2020 as well as enhance its ability to benefit from growing U.S. demand for electricity and natural gas.
Finally, Fortis is a solid defensive hedge against economic uncertainty and market volatility.
One of the most important of Fortis’s characteristics is its wide economic moat, which–along with the steep regulatory barriers to entry to the electricity-generation and transmission industry–protects it from competition. In conjunction with the demand for electricity being highly inelastic, because it is an essential element of our modern lives, this makes Fortis essentially immune to downturns in the economic cycle.
These defensive characteristics make Fortis a solid hedge against a market correction or economic slump.
So what?
Fortis possesses an impressive business that has steadily grown through a series of well-managed accretive transactions. With its solid growth prospects and strong defensive characteristics as well as a dividend that has risen every year for the last 42 years that now yields a juicy 3.7%, it is a stock that should form a core holding in every portfolio.
