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Why the Fortis Stock Price Rose 7.1% in January

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A top, reliable, and defensive dividend stock like Fortis Inc. (TSX:FTS) does not need much of an introduction. With 99% of its earnings coming from regulated and/or long-term contracted utility infrastructure, as well as a 46-year history of dividend growth, this $26 billion electric and gas utility holding company has long been a staple holding for dividend investors.

Let’s look at the reasons why Fortis stock’s January performance was so positive and what this means for the bigger picture.

Fortis stock price benefits from clearing up of the funding issue

Fortis stock has long suffered from the fact that its funding plan of its future capital expenditures was less than desirable. The company adopted an at-the-market (ATM) offering plan, which is when a company issues shares incrementally over time into the existing trading market. While this makes sense in some ways, it also created uncertainty and a perpetual overhang for the stock, which resulted in the shares trading at a discount.

Further to this, we know that Fortis has a DRIP program, whereby shareholders have the opportunity to receive additional shares in lieu of dividend payments. Fortis’ DRIP allowed investors to buy shares at a 2% discount to the market price, which was another pressure on the stock price and ultimately also resulted in Fortis stock being discounted.

In December 2019, Fortis made the decision to eliminate the ATM program and the 2% discount in the DRIP program in the hopes that Fortis stock price would better reflect its true value. To bridge the funding gap, Fortis did a $1.5 billion equity issue. This change brought more certainty and clarity to the stock, and although the equity issue was obviously an EPS-dilutive event, the benefits in the form of risk reduction and greater certainty and visibility more than made up for it.

In the end, all of this paid off handsomely. We already know that the stock rose 7.1% in January, but if we look at Fortis stock price performance since the beginning of December, we can see that it has risen over 10% since then.

Fortis: a top dividend stock in Canada

With these issues resolved, I believe that Fortis can now be recognized as a top dividend stock in Canada, and accordingly, the stock can be valued in a more accurate way that reflects its top-quality business and dividend growth.

As I have mentioned, a very special feature of Fortis is its history of exceptional dividend growth. Looking ahead, with the company’s stated annual dividend growth target of 6% being extended through 2024, we can continue to feel confident that this track record will continue.

Foolish final thoughts

Now that the overhang has been addressed and funding is clearer and cleaner, Fortis stock can be expected to continue to outperform and it remains a top dividend stock for 2020. Not only does Fortis have its strong base of quality gas and electric assets, but the company also has strong growth opportunities that are being driven by regulated investments in grid modernization, clean energy, and the emergence of LNG infrastructure.

In closing, I would like to remind Foolish investors of our belief in holding great businesses for the long term. While this belief remains intact, we are also aware that short-term stock price movements sometimes open up opportunities to create wealth.

Blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.

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 Karen Thomas has no position in any of the stocks mentioned.

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