There aren’t that many A-grade Canadian companies, but Fortis Inc. (TSX:FTS)(NYSE:FTS) is certainly one of them. It’s been awarded an S&P credit rating of A-, has had a successful track record of acquisitions, and has increased its dividend per share for more than four decades!
The leading utility has dipped about 10% from a recent high of $44 due to rising interest rates, which doesn’t bode well with slow-growing utilities. Is it an opportunity to buy Fortis while it trades at about $40 per share and yields nearly 4%?
Here are some important facts for you to review before you make a decision.
Diversified, predictable business
Fortis is one of the top 15 utilities in North America and has 10 utility operations across the continent. It operates in nine U.S. states, five Canadian provinces, and three Caribbean countries. The company has a low-risk, diversified portfolio with about 3.2 million electric and gas customers.
Because Fortis’s returns on equity are regulated, it’s a stable business with predictable returns.
Fortis’s October acquisition of ITC Holdings enhanced its regulatory diversity and simultaneously lowered its overall rate-regulatory risk because ITC’s rates are regulated by the FERC. ITC is the biggest independent, fully regulated electric transmission utility, so it also increased Fortis’s business diversification.
Safe 4% yield and growing dividend
The pullback to about $40 per share pushes Fortis’s yield to 4%. The yield is safely supported by a payout ratio of 73%.
The diversified utility has increased its dividend for 43 consecutive years. With the predictability of its regulated assets, management anticipates growing its dividend per share by 6% per year on average through 2021.
Fortis trades at a multiple of 18.3 which aligns with its long-term normal multiple of 18.5. So, the shares are fairly valued, but one would argue that it’s trading at the higher end of its valuation range.
Due to rising interest rates, interested investors should probably wait for it to dip further before buying. A multiple of 16.5 at about $36 with a yield of roughly 4.4% would be a decent value.
If you’re looking for a low-risk investment with a solid dividend, Fortis is your stock. However, higher interest rates will likely continue to pressure the shares in the near term.
An investment in Fortis today has an estimated total return of about 10%, which is attractive for a low-risk investment.
That said, based on the current environment and Fortis’s growth prospects, a safer buy range target would be $36-38, implying a minimum yield of 4.2%. If the shares fall further than that, it’d be time to consider backing up the truck.
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.