Just because the S&P 500 entered a bull market (officially) doesn’t mean it’s time to get too greedy. If anything, investors should be more selective with stocks they choose to buy after a sizeable 20% move in the major U.S. averages off last year’s lows. Though some of the bearish folks on Wall Street may anticipate a pullback over the near term, I’d not look to overreact either way. Stocks could continue moving higher from here, as the strength begins to broaden out across some of the cyclical value names that may not have contributed as much to the broader market’s run.
Indeed, recent strength in markets is thanks in large part to tech. Specifically, mega-cap tech and AI-related names. Going forward, I think the value plays that have mostly sat on the sidelines could be in a great spot to make up for lost time. If the rally broadens, the bull may find itself with enough legs to power through the next coming months without the “market correction” that some skeptical strategists see.
Relative laggards like Fortis (TSX:FTS) may be in a spot to help do a bit more of the heavy lifting that tech has done in recent quarters.
Sure, defensive dividend stocks and value plays may lack the same catalysts (AI), while also feeling the pains of higher interest rates (the Bank of Canada raised by 25 basis points yet again last week). In any case, value is the name of the game. And in that regard, it’s tough to stack up against the “Steady Eddies” here, especially after their recent dips.
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The heavyweight of higher rates
Fortis stock is one of my favourite bond proxies. In recent years, though, the stock has really struggled to take off. Of course, high rates aren’t good news for the firm which aims to invest considerable sums into its steady, cash-generating utility projects. Though Fortis’s cash flows are more resilient in the face of economic headwinds, continued rate hikes from central banks could act as some sort of overhang on the stock.
Why? Not only do rates increase the costs of borrowing for efforts such as growth projects, but they also create more compelling alternatives in the fixed-income universe.
Higher rates have paved the way for higher bond yields and more attractive rates on risk-free investments like GICs (Guaranteed Investment Certificates). As GIC rates reach (and breach) the 5% mark, suddenly the dividend yields of even the steadiest utility stocks don’t look at attractive. Fortis may be one of the steadier names on the TSX, but it’s still technically a “risky” asset, given there’s always a risk of losing money with any stock.
GICs are bountiful nowadays. Why bother with defensive dividend stocks?
At writing, FTS stock yields just 3.95%. That’s quite a bit less than a GIC with a 12-18-month term. Depending on where you look, you can grab a yield of around 4.5%, without having to risk one’s principal. GICs seem like a great buy right here.
Still, I’d not turn against defensive dividend champions like Fortis just yet. At around 19.4 times trailing price to earnings, you’re getting a pretty reasonable price for a firm that has a wide moat surrounding its cash flow stream. With single-digit growth in the cards from here on out, I’d argue Fortis stock could be the more bountiful investment from a total returns standpoint.
The stock has already been through so much turbulence at the hands of rate hikes and macro concerns. As inflation and rates normalize, I think the stage looks quite compelling for Fortis over the next three years.
The bottom line for Fortis stock
GICs may be the safer bet here, but I find few reasons to go 100% aboard the GIC boat, neglecting value names like Fortis along the way.
