Fortis Inc. (TSX:FTS)(NYSE:FTS) has had a great run over the past year. The stock has delivered a very impressive 17% in capital gains to go with a bountiful 3.6% dividend yield. The stock is a haven for income investors to put in their TFSA accounts thanks to the safety offered by Fortis as well as the utility sector in general. Fortis is a great way to grow your wealth safely, but with the recent run up in the stock price, is the stock still a safe bet?
Utilities are a safe bet, aren’t they?
Utilities are usually known as safe bets, but what does that actually mean? It means these stocks are subject to less volatility, but be careful because overvalued stocks, even if they’re in a safe sector, can cause investors to lose big time. As we’ve seen with Fortis in the peak of early 2015, the stock lost about 16% of its value, and if you’d bought the stock at the wrong time and sold it immediately after, you would have gotten hurt from this “safe” stock.
There’s no certain way to reduce your risk completely and invest 100% safely in the markets, so it’s always wise to pick undervalued stocks at a discount to their intrinsic value. Warren Buffett used to love stocks with a “margin of safety,” which are stocks that have been significantly beaten down below the true intrinsic value of the business.
Price is what you pay, value is what you get
In the case of Fortis, I don’t see much value here. If you’re a short-term investor, don’t bother investing in a utility, especially Fortis, because this safe stock can actually be a dangerous one if you don’t play your cards right. Fortis is generally known to have a safe dividend, which is true considering that 94% of its assets are regulated and the dividend-growth history of the company has been quite consistent over the last few decades.
The news about the acquisition of ITC Holdings Corp and the U.S. exposure are already baked into the stock price, so you’d be paying a premium for asset growth as well as the predictability of the stock. Predictability is a nice thing to have while investing, but could cost you future returns, especially if you’re a young investor.
If you’re a long-term investor or a retiree looking for a safe yield, and if you’re not concerned about the movement of the stock price, then you can do no wrong investing in Fortis today. If you’re a young investor, you could probably do way better in another sector, as utilities are at a high point right now.
Fortis currently trades at a 22.8 P/E, which is slightly higher than its five-year historical average value of 20.5. Fortis is not extremely overvalued, but there is very little value here for a value investor or a young investor. It really depends on who you are and what your investment plan is. The dividend is almost guaranteed to be paid and is very likely to see 6% raises each year over the next few years. If this helps you sleep at night, you should buy it, but I believe there are better opportunities if you’re hungry for dividend income.
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Fool contributor Joey Frenette has no position in any stocks mentioned.