Global markets were somewhat in disarray over the last 12 months. Markets remain volatile thanks to a lollapalooza of negative news, including the continued low-oil-price regime, a slower than expected U.S. recovery, the Brexit impact, and fears over Chinese economic stagnation.
In an uncertain environment, investors are expected to re-price shares with defensive features that would somehow limit the effects of the market volatility. One stock that comes into mind is an electric and gas utility holding company named Fortis Inc. (TSX:FTS)(NYSE:FTS).
At current prices, its dividend yield is almost 4%–higher than fixed-income securities. An enterprising investor could evaluate Fortis as a fixed-bond instrument paying 4% a year with lots of “growth optionality.”
Its history can be traced back to the formation of St. John’s Electric Light Company in 1885 in Newfoundland and Labrador. At present, it has nine utility operations in Canada, the U.S., and the Caribbean. Based on the December 2015 figures, about 92% of its earnings are from regulated utilities, reiterating the stability of its cash flows for a long period of time.
Earnings per share and dividends per share (2006 to 2015)
As shown in the above chart, the company did not produce a “down year” during the 10-year period. While the trend does not appear to be a straight line, earnings per share have grown from $1.37 in 2006 to $2.59 in 2015. Consequently, it has rewarded its investors by increasing its dividend payout from $0.67 per share in 2006 to $1.40 per share in 2015.
In addition to being in the low-risk regulated business, the company’s continued capital spending to diversify its energy investments has contributed to the steady financial performance. One of its strategic plans is to focus on investments and progress regulatory filing and applications. Over the next five years, capital expenditures are forecasted to be at $9.3 billion, which would have direct impact on its overall profitability.
Diversify, diversify, diversify
Early this year, the company announced that it has entered a deal with ITC Holdings Corp. (NYSE:ITC) valued at $14 billion. The transaction is value-accretive for the company and will expand access to various power markets; it’s expected to have incremental revenue of about $6 billion.
It should be noted that the company has successfully acquired companies in the past, implying that the ITC acquisition will have synergistic effects on the overall financial performance of the company. Further, it has enough financial flexibility with acceptable debt to equity of 1.40 times in 2015, giving Fortis enough room to pursue its expansion and acquisition plans in order to diversify its sources.