Debunking the Myths About Utility Investments

Utilities such as Fortis Inc. (TSX:FTS)(NYSE:FTS) are often regarded as boring, limited-growth investments that should be avoided as interest rates rise. Here’s an alternative take to ponder.

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When it comes to selecting an investment that will keep providing a steady stream of income throughout retirement, Fortis Inc. (TSX:FTS)(NYSE:FTS) is often mentioned as one of the best options to invest in.

That still holds true, and there are several reasons why Fortis makes a great long-term investment. What many investors fail to realize, however, is that Fortis is not just an income-producing investment, but it could also be a source of incredible growth for investors who add the company to their portfolio early on.

The boring utility myth

Incredibly, there’s still a school of investors that pass on investing in utilities such as Fortis, primarily due to that notion that utilities are “boring investments that lack growth.”

This couldn’t be further from the truth, particularly with regards to Fortis.

Most of a utility’s revenue comes from regulated contract agreements that are often referred to as power-purchase agreements (PPA). The PPA sets out the amount of power the utility that the utility will provide, what rate the utility is compensated for providing that power, and for how long the duration of the PPA will remain in force, which can often be upwards of two decades.

This provides the utility with an incredibly stable and recurring source of revenue, typically passed on in part to investors in the form of a very handsome dividend. Critics of this model argue that there’s little room left for the utility to invest in growth after paying for that dividend.

This is where Fortis breaks the mould. The company has a nearly insatiable appetite for growth, completing ever-larger acquisitions over the years, culminating in the $11.3 billion deal for ITC Holdings back in 2016. This is a key reason for Fortis’s ascension as one of the 15 largest utilities on the continent.

Rising interest rates + utilities. Good or bad?

Another common concern among investors is that in an environment with rising interest rates, utilities such as Fortis will witness downward pressure on the stock price as the cost of its debt begins to rise.

We’re already seeing the first signs of this, as the stock is already down over 9% year to date, which, by extension, has made Fortis’s incredibly stable and secure dividend yield spike to an appetizing 4.06%.

If anything, this has made Fortis an even more compelling investment for income-seeking investors, particularly considering Fortis’s impressive record of providing consecutive annual or better hikes to the dividend that spans well over four decades.

Even better is the fact that Fortis continues for forecast 6% or better growth to the dividend annually for the next several years.

The interest rate hikes haven’t translated into weaker results either. In the most recent quarter, Fortis posted net earnings of $364 million, or $0.77 per share, which was an improvement of $27 million over the $337 million, or $0.72 per share, reported in the same quarter last year.

In my opinion, Fortis remains an excellent long-term investment for those investors looking for both income and growth.

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 Demetris Afxentiou has no position in any stocks mentioned.  

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