Market analysts talk about defensive stocks and their value in a portfolio, especially when the market is volatile. But you can only see its true nature in an actual scenario. In the 2020 pandemic, electric and gas utility company Fortis (TSX:FTS)(NYSE:FTS) is displaying its defensive characteristics.
Utility stocks are known to be risk-reduction tools. You can tell that Fortis is a safe investment based on the stock’s performance amid the COVID-19 pandemic. Investors are not losing, thus far, which is incredible considering the extreme volatility.
Proving its worth
The shares of Fortis were trading at $52.80 at the beginning of the year. It fell to $42.20 on March 23, 2020, during the height of the market panic. As of May 29, 2020, the stock price of May 29, 2020, is $53.01, which is slightly higher than it was in early January. More importantly, dividend payments will continue without a cut.
Fortis is living up to its status as a dividend all-star. The dividend streak of this $24.61 billion company is 46 years. A $50,000 investment can generate $1,805 in passive income from its 3.61% dividend yield. Your money will grow to $101,625.68 in 20 years. Analysts are forecasting a 20.7% price appreciation in the next 12 months.
The strength of Fortis lies in the business model. Because it is a regulated utility entity, cash flows and profits are highly predictable. It also explains the consistent dividend. The regulatory mechanisms insulate Fortis from downside risks. Whether it’s a pandemic or recession, this top-tier stock will put on a good show.
Fortis operates in the energy value chain. Aside from electricity, it also distributes gas. Both are essentials to residential and commercial customers can’t live without. This stock is often correlated with bonds, although it’s a superior value option, if you ask me.
For Q1 2020, Fortis reported $312 million in earnings, or $1 million better than Q1 2019. Management believes the uncertainty will persist for as long as COVID-19 is around. The company, however, is not changing its long-term outlook.
Under its $18.8 billion five-year capital plan, the rate base will increase to $34.5 billion by 2020, then jump to $38.4 billion by 2024. The effects are compound annual growth rates of 7.2% and 6.5% within three and five years. Also, the company is committing to a 6% average annual dividend growth through 2024.
A must-own for ordinary investors
Let me give four reasons why Fortis is a must-own stock for ordinary investors. You don’t need a full understanding of the market condition to invest. When the market is volatile, and you are a risk-averse investor, this utility stock is the safest choice. If you want a stable dividend income, only a dividend all-star can make it possible.
The growth platform of Fortis is resilient, while the business is diverse and protected by regulatory mechanisms. Over the long term, all these plus factors should ensure the creation of shareholder value.
Lastly, you can check the vulnerability or risk factor through the beta score. The best defensive stocks have beta less than one, which indicates a less-volatile stock. Fortis has a beta of 0.10. Need I say more?
Speaking of Fortis as a defensive stock...
Motley Fool Canada's market-beating team has just released a new FREE report that gives our three recommendations for the Next Gen Revolution.
Click on the link below for our stock recommendations that we believe could battle Netflix for entertainment dominance.
Fool contributor Christopher Liew has no position in any of the stocks mentioned.