Fortis (TSX:FTS) stock stands out as a top Canadian Dividend Aristocrat that has consistently increased its dividend for almost half a century! Over the last 10 years, it has increased its dividend by approximately 6% per year.
A blue-chip stock you can rely on for steady dividend payments
The predictability of the blue-chip stock comes from its assets that are diversified across 10 regulated utilities. Furthermore, about 93% of its assets are for the essential services of energy transmission and distribution. Approximately 3.4 million electric and gas customers rely on Fortis to deliver energy to them. They require this service no matter if the economy is doing well or not. So, Fortis is well known to make highly stable earnings through economic cycles.
For example, in the last 20 years, Fortis’s adjusted earnings per share only declined in four years. In the worst year, it was a drop of roughly 6%. In all down years, its earnings swiftly recovered by the following year.
Last year, Fortis stock’s payout ratio was sustainable at 78% of adjusted earnings. It also has reserves of about $3.9 billion in its retained earnings that, if needed, can serve as a buffer for about five years of dividend payments.
When investors buy shares of Fortis, they can rely on its predictable results and steadily growing dividend payments. However, this is why the blue-chip stock commands a premium valuation.
High valuation but clarity on growth expectations
The regulated utility commands a long-term normal price-to-earnings (P/E) ratio of approximately 19.5. This is a premium valuation to pay for a company that is expected to increase its earnings per share by about 5.6% per year over the next three to five years.
For reference, management has declared guidance to increase its dividend by about 4-6% per year based on its five-year capital plan of $22.3 billion through 2027. So, it’s reasonable for investors to anticipate dividend growth of more or less 5% per year over the next few years.
The capital plan will maintain the utility’s 99% regulated assets. It’s a low-risk multi-year capital plan that consists of 83% of smaller projects. The projects are primarily diversified across its regulated businesses in Canadian and Caribbean electric and gas, U.S. electric and gas, and independent electric transmission in the United States.
Investor takeaway
Fortis enjoys a quality S&P credit rating of A-. It is the kind of defensive stock that conservative investors might seek. As blue chip and predictable as the stock gets, though, it is a stock, nonetheless. In other words, investors would need to be able to bear the volatility of the stock. Take a closer look at the stock price graph above for an idea.
Moreover, the utility stock tends to trade at a premium valuation, which generally prevents investors from getting extraordinary returns from the dividend stock (unless you’re able to capture shares when it’s on sale).
At $57.46 per share at writing, the stock is fairly valued and offers a dividend yield of about 3.9%. So, investors can estimate getting long-term annualized returns of roughly 8.9% per year over the next few years on shares bought today.
