Fortis Inc. (TSX:FTS)(NYSE:FTS) recently closed a major acquisition, and investors are wondering if the company has bitten off more than it can chew.
Let’s take a look at the current situation to see if Fortis deserves to be in your portfolio.
Rapid asset growth
Fortis just completed its US$11.3 billion purchase of ITC Holdings Corp., the largest independent transmission company in the United States.
The deal comes just two years after Fortis spent US$4.5 billion to buy Arizona-based UNS Energy.
When Fortis announced the ITC purchase earlier this year, the market initially reacted negatively. Some analysts were concerned Fortis would have to take on too much debt.
As part of the financing, Fortis entered an agreement to sell a 19.9% stake in ITC to GIC Private Limited, Singapore’s sovereign wealth fund. GIC agreed to pay US$1.228 billion in cash on closing for its stake in ITC, allowing Fortis to maintain its investment-grade credit rating.
As a result, the cash portion of the ITC purchase was funded through approximately US$2 billion in new debt plus the contribution from GIC.
The market has since become more comfortable with the takeover.
Fortis continues to grow in Canada too. Last year the company completed the expansion of its Waneta hydroelectric facility in B.C. and bought B.C.’s largest gas storage facility in the spring of 2016.
U.S. exposure
The addition of UNS and ITC puts 60% of the assets in the United States. As a result, Fortis is now listed on the New York Stock Exchange, which should bring more attention to the stock.
Dividend growth
Fortis is one of Canada’s top dividend-growth names. The company has raised the payout every year for more than four decades and recently hiked the quarterly distribution by 6.7% to $0.40 per share.
The current payout provides a yield of 3.7%.
Management expects to deliver average annual dividend increases of at least 6% through 2021. Given the company’s track record, investors should feel reasonably comfortable with the plan.
Should you buy?
Fortis has a proven history of successfully integrating acquisitions into the portfolio, so the ITC purchase shouldn’t be too big to handle.
The company now has a diversified revenue stream coming from regulated electric and gas assets located in five Canadian provinces, nine U.S. States, and three countries in the Caribbean. This spreads out geographic risk.
When interest rates begin to rise, utilities will start to lose some of their appeal, so investors have to keep this in mind when looking at the stock. However, if you want a reliable dividend-growth pick to tuck away in your TFSA for a couple of decades, Fortis remains an attractive pick after the big acquisition.
