Fortis Inc. Is an Income Stock to Buy and Hold Forever

Fortis Inc. (TSX:FTS) is one step away from adding a huge asset to its portfolio, which will help it increase the dividend significantly.

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Fortis Inc. (TSX:FTS) continues to receive good news about its acquisition of ITC Holdings Corp. (TSX:ITC), which should get investors even more excited about the possibilities this presents to the company. Fortis received permission at the end of September from the U.S. Federal Energy Regulatory Commission to make the US$11.3 billion acquisition. Now it just needs the state of Kansas to give its approval, and this deal should close by the end of 2016 or the beginning of 2017.

For those who don’t know, last February Fortis agreed to buy the United States’s largest independent electric transmission company. All told, ITC operates 15,600 miles of high-voltage lines. It has facilities in Illinois, Iowa, Kansas, Michigan, Missouri, and Oklahoma. It has peak load exceeding 26,000 megawatts. This deal will make Fortis one of the 15-largest public utilities by enterprise value in North America.

Should this deal go through–and there’s little reason to believe it won’t at this point–the acquisition will provide 5% earnings accretion in the first full year following close. It also means that 61% of its operating earnings will come from the United States, which is a big change from where it was only five years ago.

Fortis first got started with its heavy-acquisitive nature in 2011 when it attempted to buy the Central Vermont Public Service for US$700 million. Though it failed, it turned its attention to CH Energy Group, which owned Central Hudson, an energy company that provided electricity and natural gas in upstate New York. For US$1.5 billion, Fortis gained 300,000 electric and 75,000 natural gas customers.

In 2013 Fortis made an even larger acquisition; it purchased UNS Energy, a utility company in Arizona, for US$2.5 billion. With 650,000 natural gas and electricity customers, this gave Fortis exposure to much of southern Arizona.

In total, Fortis spend US4 billion and gained over a million new customers. All told, these two acquisitions account for 36% of the company’s operating earnings, which is huge. And now you can see why the ITC deal is so important for the company.

But as income investors, here’s why you should be excited.

Fortis has 94% of its assets regulated. This means that it can be predict with 94% certainty what its return on equity will be. This enables it to keep risks low and manage its cash flows responsibly.

It also allows Fortis to pay a lucrative yield that continues to grow. For 42 years, Fortis has increased the dividend. In 2005, its dividend was only $0.59 per year. Fast forward to 2015, and the dividend was $1.40 per share. But it’s 2016, and that means management increased the dividend again by 7%. It now pays $0.40 per share a quarter. Management expects to increase the dividend by at least 6% per year through 2020.

There’s only one negative. Everyone else knows that Fortis is a lucrative company, so the price is a little bit more expensive than most investors feel comfortable paying. However, with at least 6% increases to the dividend expected in 2017, 2018, 2019, and 2020, that should more than offset the premium in stock price. I believe this is a great stock to own and that investors should buy now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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