Fortis Stock Is a Great Buy in 2023

Defensives like Fortis will be in focus in 2023.

| More on:
High pressure wire tower at sunset at dusk

Image source: Getty Images

TSX utility stocks saw major drawdowns, as interest rates rose rapidly last year. Higher rates made Treasury yields more attractive, making bond proxies — utilities — less appealing. But as we might see the rate hike cycle slowing by mid-2023, it’s time to put utility stocks on our watchlists.

What’s next for Fortis stock?

Canada’s largest utility stock Fortis (TSX:FTS) lost 25% between August to October 2022. While that’s a normal drawdown for a growth stock, it’s a massive value erosion for utilities. But FTS has seen a decent up move of late and has recovered 16% since October.

If you are okay with relatively lower returns and value stability, Fortis is an apt bet. Stocks like FTS might underperform broader markets in the short term, but its stable dividends and the less-volatile stock have beaten broader markets in the long term.

To be precise, FTS stock has returned 50% in the last five years and 140% in the last decade, including dividends. In comparison, the TSX Composite Index has returned 26% and 60% in the same period, respectively.  

Utilities like Fortis grow their earnings very slowly relative to broader markets. In the last decade, its per-share earnings increased by 4%, compounded annually. However, some riskier options, like tech stocks, grow their earnings quite rapidly compared to this. And that’s why tech stock substantially outperforms utilities in bull markets. So, if you have a higher risk appetite, growth stocks, tech, or biotech names might be suitable bets for you instead of utilities.

Earnings and dividend stability    

Fortis operates as an electric and gas utility and serves over three million customers in Canada, the U.S., and the Caribbean. It generated almost the whole of its profits from regulated operations, facilitating stable financial growth. Unlike tech or other risky sectors, utilities have stable cash flows in almost all economic cycles. And that’s why Fortis has increased its shareholder payouts for the last 49 consecutive years through years of recessions and even the pandemic.

And it’s not just Fortis; many utilities have such long payment histories because of their stable earnings. For example, peer Canadian Utilities (TSX:CU) has increased its dividend for 50 consecutive years.

Fortis intends to raise its dividend by 5% annually through 2027. This dividend growth visibility also stands strong in these uncertain times. Its low-risk business operations and earnings stability will drive this dividend growth in the long term.

Moreover, utilities pay a significant portion of their profits to shareholders as dividends. So, while other sectors pay out around 20% of their earnings, utilities give away more than 60% of their profits as dividends. Fortis’s payout ratio was 53% in the last 12 months, while Canadian Utilities’s was 81%.    

Valuation

FTS stock saw a steep fall last year amid its rich valuation. However, it is currently trading 20 times its earnings and looks relatively fairly valued. It might not see a significant recovery soon, as rate hikes continue, at least in the first half of 2023. But the downside also looks limited, as the damage has already been done. Its stable dividends and less-volatile stock make it an appealing stock in volatile markets.

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.

The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Dividend Stocks

Going against the grain
Dividend Stocks

Contrarian Investors: 2 Discounted High-Yield Dividend Stocks for Passive Income

These top TSX dividend stocks now have 7% dividend yields.

Read more »

Dividend Stocks

Bank of Canada Rate Cuts: Best Stocks to Buy Right Now

These are the best stocks to buy with interest rates coming down. Don't just save money; start making it, too!

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

2 of the Top Dividend Stocks in Canada

Here are two of the best buy-and-hold-forever dividend stocks in Canada you can bet on.

Read more »

A meter measures energy use.
Dividend Stocks

2 Utility Stocks That Benefit From Interest Rate Cuts

Further rate cuts could mean a healthy rise in share price for these two undervalued utility stocks.

Read more »

You Should Know This
Dividend Stocks

Goldilocks Markets and Record Highs: What Investors Need to Know

Right now, conditions are "just right" for a "Goldilocks" market, so here's what investors need to know and where to…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Avoid These TFSA Pitfalls to Keep More of Your Money

Investors continue to make many mistakes in a TFSA, so let's look at how to overcome them with these tips,…

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Beat the TSX With These Cash-Gushing Dividend Stocks 

The TSX is a gold mine for dividend stocks. You can find 6% yield stocks that even grow their dividend…

Read more »

Golden crown on a red velvet background
Dividend Stocks

These 5 Stocks Have Unstoppable Dividend Growth

These five stocks can form a diversified stock portfolio of dividend aristocrats from the TSX.

Read more »