Fortis (TSX:FTS) Is 1 of Canada’s Top Defensive Stocks

Fortis Inc (TSX:FTS)(NYSE:FTS) has trailed the index in 2019 but is the perfect stock to protect against a market downtrend.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

As the TSX Index hits new highs almost daily, it is wise to protect your portfolio against a potential downtrend. One of the best ways to do so is to ensure your portfolio has a good number of defensive stocks. Defensive stocks are those that will do well regardless of economic environment and most often pay a dividend. The demand for their products and services remains stable and isn’t subject to business cycles.

Industries such as utilities, apartment REITs, and consumer staples are defensive in nature. Consumers need power, a roof over their heads, and food regardless of economic conditions. My favourite of these industries is utilities. If you think utilities make for boring investments, think again. In 2019, the S&P/TSX Capped Utilities Index is up a whopping 32%, far outpacing the broader index. It is a clear sign that the shift towards defensive investments has already begun.

The most attractive aspect of a utility is its ability to generate stable and reliable cash flows. In turn, this leads to a stable, growing, and reliable dividend. Take a look at the top five Canadian Dividend Aristocrats:

Rank Name Streak
1 Canadian Utilities 48 years
2 Fortis (TSX:FTS)(NYSE:FTS) 46 years
3 Toromont Industries 30 years
4 Canadian Western Bank 28 years
5 Atco 26 years

Three of the top five Aristocrats are utility companies. My favourite of the bunch is Fortis, and I consider it one of the top defensive stocks in the country.

Strong performance

In 2019, Fortis has surprisingly underperformed, as it has only returned approximately 16% thus far. This, however, is a good thing for those looking to start or add to a position. As mentioned previously, the S&P/TSX Capped Utilities Index has been on fire, and, as a result, many utility companies are trading at record-high valuations. This is not so for a company like Fortis. It is currently trading at a respectable 14.32 times earnings and 1.45 times book value. This is well below the industry average of 24 times earnings and 1.77 times book value.

When it comes to performance, it is also important to take into account the long-term view. Over the past five years, Fortis has averaged 7.3% annual returns, outpacing both the TSX Index (4.82%) and the S&P/TSX Capped Utilities Index (4.56%). It has been a similar story over the past decade. Fortis’s 9.9% average annual returns is double that of the TSX Index (4.86%) and the S&P/TSX Capped Utilities Index (4.67%).

Fortis has made a few transformational acquisitions south of the border, which has enabled it to average 17% annual earnings growth of the past five years. Such growth rates are a rarity in this regulated sector. Industry consolidation is one of the only ways to achieve such high growth rates, and Fortis has proven to be very efficient at capital allocation.

At 46 years and counting, Fortis also owns the second-longest dividend streak in Canada. The company also stands out as it provides guidance with respect to future dividend growth. Not all companies can afford to do this, but Fortis has such stable cash flows that it can predict dividend growth well into the future. The company has targeted 6% annual dividend growth through 2024.

At today’s prices, investors can lock in a starting yield of 3.66% and can grow their income by at least 6% annually over the next five years. Considering Fortis has never missed on its dividend-growth guidance, it is as close to a guarantee as investors can get.

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 Mat Litalien owns shares of FORTIS INC.

More on Dividend Stocks

Tech Stocks

Got $300? 2 Simple TSX Stocks to Buy Right Now

These two TSX stocks aren’t as popular as other names, but they are smart buys right now because both are…

Read more »

Increasing yield
Dividend Stocks

3 TSX Stocks With High Dividend Yields

Not all stocks with high-dividend yields are great buys. Here are three stocks to consider for your portfolio today.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

Dividend Lovers: 2 U.S. Stocks to Power Up Your Portfolio

Dividend investors in Canada can consider buying these two top U.S. stocks right now to diversify their portfolios and get…

Read more »

Growth from coins
Dividend Stocks

2 TSX Stocks to Buy With Dividends Yielding More Than 3%

Here are two TSX stocks to buy today with dividends yielding more than 3%!

Read more »

growing plant shoots on stacked coins
Dividend Stocks

TFSA Passive Income: Earn $317 Every Month Tax Free for Life

By leveraging A TFSA, Canadians can earn a tax-free passive income of $317 every month for life.

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Dividend Stocks

2 Cheap TSX Dividend Stocks to Buy Now for a TFSA or RRSP

TFSA and RRSP investors can now buy top TSX dividend stocks at cheap prices for portfolios focused on passive income…

Read more »

Man data analyze
Dividend Stocks

Have $1,000? 2 All-Weather Dividend Stocks to Buy and Hold Forever

Canadians with $1,000 to invest can buy two all-weather dividend stocks today and hold them forever.

Read more »

office buildings
Dividend Stocks

2 Stocks to Invest in U.S. Real Estate

Do you need more income? Consider diversifying your real estate portfolio to the south via value U.S. REITs.

Read more »