A top, stable utility
Recently, Fortis got listed on the New York Stock Exchange. It has become one of the top 15 utilities in North America. Its recent acquisition of ITC Holdings provides a strong platform for it to grow in the electric transmission sector in the U.S.
Fortis is essentially a regulated utility that operates in nine U.S. states, five Canadian provinces, and three Caribbean countries. So, it has tremendous economic, geographic, and regulatory diversity. As a result, its returns are stable and predictable.
Successful acquisition history
Before combining with ITC, Fortis has successfully acquired other utilities. In the last few years, its focus has been on acquiring U.S. assets, including Central Hudson, which operates in Arizona, and UNS Energy, which operates in the New York state.
These acquisitions allow Fortis to earn profits in U.S. dollars, which increases its top and bottom line since the greenback is typically stronger than the loonie. In fact, from 2012 to 2015, Fortis delivered earnings-per-share growth of almost 7.7% per year.
Fortis is a top dividend-growth stock. This year marks the 44th consecutive year that Fortis has hiked its dividend!
Fortis’s dividend-growth streak is proof that the utility maintains solid profitability in all economic environments. Moreover, it shows that management is committed and willing to share profits with shareholders in the form of dividends.
This year’s payout ratio of 70% is reasonable and sustainable. Management has already set a target to hike Fortis’s dividend per share by 6% per year through 2021.
Fortis’s dividend growth will be supported by its five-year capital program involving investments of $12.8 billion.
The investments will be diversified across three main segments: roughly 42% in Canadian and Caribbean assets, 29% in U.S. electric and gas assets, and 28% in independent transmission assets through ITC. These are all regulated assets.
Fortis is a great company if you want a strong, growing dividend. At $41 per share, it yields 3.9%, which is pretty good. However, the shares remain nearly fully valued. So, investors should wait for at least a 4% yield (or a maximum price of $40 per share) before considering the shares.
Other buying opportunities may present themselves–for example, if Fortis makes another acquisition in the future. After all, when it announced the acquisition of ITC, its shares fell 12% in a day, and it proved to be a buying opportunity then. In the near term, though, Fortis will be working on integrating ITC.
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 Kay Ng owns shares of FORTIS INC.