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Fortis Inc.: Should Defensive Investors Own the Stock as Interest Rates Rise?

A rising interest rate environment is a slight headwind for many high-yield securities in the utility industry. Many investors who value preservation of capital above all else usually have a large chunk of their portfolios allocated to such defensive utility stocks.

Despite the long-term headwind of increasing interest rates, I still think it makes a lot of sense to hang on to your utility stocks. Oftentimes, utilities with a strong management team usually find a way to offset gradual long-term headwinds like rising rates. Such businesses are capable of delivering top-notch results and dividend growth for shareholders over the long haul regardless of the direction interest rates are headed.

Fortis Inc. (TSX:FTS)(NYSE:FTS) is one such company with a strong management team with an above-average growth profile. When many investors think of utilities, stability and low growth often come to mind. With Fortis, not only do you get one of the most stable businesses in the industry, but you also get a rock-solid dividend and a promising growth profile, which sets it apart from its lower-growth peers.

Solid third-quarter earnings beat

Fortis recently released its Q3 2017 earnings results, which beat analyst expectations on the bottom line. The company clocked in an adjusted EPS of $0.61 for the quarter, beating the street consensus of $0.59. The slight beat can be attributed to lower than expected expenses and hedges on natural gas at Aitken Creek, a B.C.-based gas storage facility acquired by Fortis.

Shares of Fortis rose slightly in the days following the release, which I believe was warranted and could be the start of a modest rally to higher levels in time.

Solid growth profile for such a stable business

Going forward, a great deal of growth will come from the company’s continued expansion efforts into the U.S. Contracted infrastructure investments will allow the company to support management’s goals of achieving dividend growth at a 6% CAGR through 2022.

The company has hiked its dividend at a consistent rate over the past decade, even during the Great Recession. Fortis has ample growth opportunities that will continue to allow for such dividend increases over the next five years and likely beyond.

Valuation

Shares of Fortis currently trade at a 19.34 price-to-earnings multiple and a 1.5 price-to-book multiple, both of which are slightly lower than the company’s five-year historical average multiples of 20.4 and 1.6, respectively.

In addition, shares trade at a 2.3 price-to-sales multiple and a 8.5 price-to-cash flow multiple, both of which are slightly higher than the company’s five-year historical average multiples of 1.7 and 7.6, respectively.

Bottom line

Fortis isn’t as cheap as it was when I previously recommended it, but if you’re a conservative investor looking to batten down the hatches, Fortis is a superb pick.

The stock is fairly valued at current levels, but now may be the time to accumulate shares if you’ve neglected the defensive portion of your portfolio of late.

The bull market has been roaring, but it’s never a good idea to not have a stable, defensive name at the core of your portfolio, because, as we both know, there’s no bell that goes off when we reach the top of a bull run.

Stay smart. Stay hungry. Stay Foolish.

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Joey Frenette has no position in any stocks mentioned.

 

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