Fortis (TSX:FTS) Stock Is Backed by Another Solid Earnings Result

Fortis stock ranks high due to the predictability of its revenue and dividend, as demonstrated in its first-quarter earnings result.

| More on:
HIGH VOLTAGE ELECRICITY TOWERS

Image source: Getty Images

Fortis (TSX:FTS)(NYSE:FTS) stock reported another solid first-quarter result. While earnings were below expectations, they were underpinned by defensiveness and predictability.

This is the company that keeps the lights and heat on. It is the company that keeps us connected to the world around us, which is always important. These days, it is even more important. Fortis powers our laptops and televisions, and keeps us less isolated and more productive. It keeps some aspects of the economy going.

Fortis stock: A stock for a crisis

Fortis’s business is defensive. It is the type of business that investors can count on for preservation of capital. This is a quality that is certainly very much in demand in these difficult times. So what if Fortis’s stock price isn’t rallying after its solid first-quarter result? The point is not the upside but the downside protection. And while we’re getting this downside protection, we also benefit from a generous dividend. Fortis’s dividend yield is currently a respectable 3.5%.

Fortis is a North American leader in the regulated gas and electric utility industry. A significant portion of its revenue is regulated and/or residential (82%), which is seeing an increase. As such, business has been maintained throughout the pandemic. As an essential service, this can be expected to remain the case.

Fortis’s conservative nature has benefited the company. It has $5 billion in liquidity, among the highest in the industry. It is relatively unscathed in this crisis.

Fortis stock: Earnings below expectations

Fortis’s earnings came in below expectations due to a number of factors that are not operational in nature. First, we should recognize that earnings were positively impacted by strong rate base growth.

On the negative side, UNS Energy earnings were a drag on the first quarter. UNS is the Arizona-based parent company of Tucson Electric Power and UniSource Energy Services. It provides natural gas and electric energy to almost 700,000 customers. The biggest reason for the weaker earnings was the reduction in the market value of retirement benefit assets.

The other Fortis companies fared much better and were the backbone of the quarter. The company’s highly regulated revenue and the essential nature of its business will be its saving grace in the coming months.

Fortis stock to continue to provide investors with dividend income

Fortis has 46 years of consecutive dividend increases under its belt. The company remains committed to its 6% average annual dividend growth guidance until 2024. The goal is to maintain this, as many investors rely on Fortis’s dividend for income.

Given the high degree of predictability of Fortis’s revenue stream, we can be confident in the reliability of the dividend. We know that the high degree of regulated revenue is protective. But in the unregulated revenue stream, there are additional safety nets.

Trends show that a decrease in commercial and industrial sales is being met with an increase in residential sales. All told, Fortis is seeing a 3% decline in sales at its utilities that do not have regulatory mechanisms. This highlights the relative stability of the company’s revenue model.

Foolish bottom line

Fortis stock is not a volatile one. This means that by definition, there is less downside. This also means that there is less upside. Because of this, Fortis represents a very attractive risk/reward trade-off. This is true, especially for the times we are in.

With many companies and stock prices being hit exceptionally hard, we need a place to hide. Fortis offers us this place while providing generous dividend income.

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.

More on Coronavirus

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft
Coronavirus

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway
Coronavirus

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »