Is Now the Right Time to Buy Fortis Stock?

Fortis stock looks cheap today. Should you buy now or wait?

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Fortis (TSX:FTS) is widely viewed as a recession-resistant stock. Contrarian investors with an eye for value are wondering if the pullback in the share price due to the broader market correction is a good opportunity to add FTS stock to their Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios.

Fortis overview

Fortis is a utility company with $64 billion in assets spread out across five Canadian provinces, nine states in the U.S., and three countries in the Caribbean. Operations include power-generation facilities, electricity transmission networks, and natural gas distribution businesses.

Fortis gets 99% of its revenue from regulated assets. This means cash flow is largely predictable and reliable. Households and companies need electricity and natural gas to keep the lights on and heat the buildings, regardless of the state of the economy. As a result, the revenue stream should hold up well even during an economic downturn.

Fortis stock trades near $54.50 at the time of writing. This is down from $65 in May last year but up from the 12-month low the stock hit in October.

Fortis generated adjusted net earnings of $1.3 billion in 2022, up $110 million compared to 2021. The company spent $4 billion last year on capital expenditures. This resulted in a 7% increase in the mid-year rate base to $34.1 billion. A higher rate base leads to revenue and cash flow growth.

Fortis is working on a $22.3 billion five-year capital plan for 2023 through 2027. The mid-year rate base is expected to grow from $34.1 billion in 2022 to $46.1 billion in 2027. That works out to be a compound annual rate-base growth rate of about 6.2%.

The board expects the resulting revenue and earnings boost to support targeted annual dividend growth of 4-6% per year through 2027. Fortis has a number of projects under consideration post-2027 that could extend the growth outlook.

The company raised the dividend in each of the past 49 years, so investors should be comfortable with the reliability of the projections for the distribution hikes.

At the time of writing, investors can pick up a 4.1% dividend yield.

Utilities typically use a good chunk of debt to finance capital projects. The spike in interest rates and rising bond yields are making it more expensive to fund projects. Soaring materials prices and higher labour expenses are also pushing up project costs. This could potentially force Fortis to delay or shelve some projects if they are no longer economically feasible.

Should you buy Fortis now?

Ongoing volatility should be expected in the coming months, but Fortis stock currently looks cheap for contrarian investors with a buy-and-hold strategy. The dividend yield is attractive today, and the payout growth projected for the next five years means your initial return will rise, even if the share price remains at its current level.

If you are concerned about a recession and have some cash to put to work in a TFSA or RRSP, Fortis deserves to be on your radar.

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 Andrew Walker has no position in any stock mentioned.

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