Utilities are such fascinating companies. On one hand, they’re incredibly boring companies because they don’t really have much opportunity to grow. On the other hand, their revenue is predictable, which puts them in a great place to pay lucrative yields to investors. However, there’s one company that turns the whole boring stereotype on its head.
Fortis Inc. (TSX:FTS)(NYSE:FTS) is one of the 15 largest utilities in North America with assets in Canada, the United States, and the Caribbean. It has grown into this behemoth thanks to a series of very smart acquisitions.
One thing that’s important to understand is, while the company is not boring thanks to the acquisitions, it is a regulated utility, which means that its earnings are stable and predictable.
To understand how aggressive its acquisitions have been, consider this: when Fortis formed in 1987, it had $390 million in assets, which was significant even in 1987. Now, 30 years later, it now has $48 billion in assets.
It first started expanding in 2003 into western Canada. It gained 415,000 Albertan customers by 2005, which was a big boost for the company. It made a series of other acquisitions throughout Canada and the Caribbean, expanding its customer base.
Fortis got really bullish when it expanded into the United States. It first tried to buy the Central Vermont Public Service for US$700 million in May 2011; however, it was outbid. In the beginning of 2012, Fortis announced that it was acquiring CH Energy Group for US$1.5 billion. By the summer, that deal had closed, and Fortis had a foothold in the United States. At the time, this gave it 300,000 electric customers and 75,000 natural gas customers.
In 2013, it acquired UNS Energy, a large Arizona utility company. This US$4.3 billion deal gave it 152,000 natural gas customers and 511,000 electricity customers. This deal also gave Fortis increased exposure to renewable sources.
The big acquisition just closed in October 2016. Fortis and a private investment group acquired ITC Holdings Corp. for US$11.3 billion, which was, at the time, the largest independent electric transmission company in the United States. This gave Fortis exposure to the American Midwest.
Now, Fortis has over three million customers, which has made it possible for Fortis to be incredibly shareholder friendly.
For more than 40 consecutive years, Fortis has increased its dividend. On average, the company has increased it by more than 5% each year for the past decade. In Q4 2016, alone, Fortis increased the dividend by 6.7%. Management predicts that it will be able to hike the dividend at an annual rate of 6% between now and 2021.
The only problem with Fortis is that it is expensive, which makes perfect sense because of its predictability. Although it’d be better to buy this stock when the yield was a little higher, as Warren Buffett says, “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I agree.
