Fortis (TSX:FTS)(NYSE:FTS) is one of the few stocks that investors can feel comfortable owning for life. The company has a moat that’s wide enough and a management team that’s clever enough to secure a 5-6% annual dividend-growth rate, regardless of market conditions at any given point in time.
While there is a plethora of other bond proxies that are as secure as Fortis (like Hydro One, which has a virtual monopoly in Ontario), few firms can match Fortis’s “risk-off” growth profile. Fortis is the epitome of a market-beating bond proxy and ought to be a top pick for those going on the hunt for “safe” yields in an era where it no longer makes sense to hold most bonds to maturity.
Fortis’s growing dividend is probably the closest thing to a guarantee outside the world of fixed income
The magnitude of what investors perceive as safety typically comes at the expense of long-term growth. With that in mind, investors need to consider finding the optimal blend of both traits to be able to score the best risk-adjusted returns.
On the surface, Fortis appears to be an unremarkable investment with an industry-standard 3.3% dividend yield and a dividend-growth rate that’s dwarfed by the double-digit growth rates commanded by Canada’s dividend-growth kings.
Unlike the midstream players with 6-7% yields and 10-15% dividend-growth rates, Fortis doesn’t have much in the way of uncertainty. Midstream players face tremendous regulatory hurdles on their pathway to growth, leaving them at risk of excess capital losses, broken dividend-hike promises, and potential dividend reductions.
Fortis, however, is a heavyweight when it comes to regulated operations, with highly predictable cash flows and a growth rate that leaves little room for surprises. As such, Fortis’s 3-4% yield with its 5-6% dividend-growth rate can be expected through both the best and worst of times; it won’t implode at the first signs of global economic weakness.
Fortis could enjoy significant multiple expansion
Bond yields are close to the lowest they’ve been in recent memory. The bond/stock mixes that worked in the past may not make as much sense in the modern era, given the 1-2% annual return to be had, which could lose ground to the rate of inflation.
As bonds become less practical, investors will naturally look to bond proxies. While the phenomenon has been somewhat apparent over the last few years, it could have the potential pick up, even if a recession isn’t in the cards. Despite the recent run in Fortis stock, shares only trade at 11.9 times EV/EBITDA — a tad lower than its five-year historical average of 12.1.
The perfect defence against the next crash
Finally, Fortis faced dampened downside come the next market crash. Not only will the peak-to-trough fall be less devastating relative to the broader indices, but the dividend will continue to grow, as business continues as if nothing overwhelming has happened to the global economy.
Moreover, given the low 0.12 beta, Fortis is more likely to zig while the markets zag, serving to help smoothen your TFSA portfolio from any market-wide bumps in the road.
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 Joey Frenette owns shares of FORTIS INC.