Fortis Inc (TSX:FTS) stock has taken a beating over the last five months. In that period, it has tumbled 13.5%, falling from $61.55 to $53.45. It has been a rare letdown from a stock that investors have come to depend on as a reliable “bond alternative.”
Fortis’ reputation for reliability and safety has mostly held up over the years. The stock has a 0.23 beta coefficient, meaning that it is less volatile than the markets as a whole. However, it does sometimes get a bit volatile, and that’s what happened this summer.
Interest rates taking a bite out of earnings
A big part of why Fortis stock took a beating over the last five months is because rising interest rates took a bite out of earnings. More accurately, rising interest rates took a bite out of earnings at utility companies especially. Fortis actually achieved positive earnings growth in its most recent quarter, but it fell in solidarity with its ailing cousins like NextEra Energy, whose interest expenses doubled in the second quarter.
High interest rates are bad for utilities because such companies typically have lots of debt. Providing heat, light, and electricity is an expensive business. It involves maintaining large infrastructure like power plants, electric lines, and service trucks. The employees who work in the business are typically highly skilled and well paid. You can’t simply “bootstrap” such an enterprise; the enormous capital expenditures it entails require borrowing heavily. The positive that results from this is very stable and predictable revenue. Because utilities are so physically entrenched in their service areas, they typically face little competition and have customers who stay with them for life. Ask yourself, has it ever occurred to you to simply stop paying your utilities? You can technically cancel them but almost nobody does except when selling their home. Most people would rather sell their cars than go cold in the winter. People may cut down on utility use when times are tough, but they don’t cancel the service entirely. So, utilities tend to have very stable revenue.
Of course, Fortis has done better than other utilities over the years. Many utilities get stuck in their ways and don’t really grow. Fortis has invested in growth over the years, buying up utilities across Canada, the U.S., and the Caribbean. The end result has been a long period of outperforming the TSX utilities sub-index, and indeed the TSX as a whole.
Dividend King status achieved!
One thing worth noting about Fortis is that it recently achieved the status of a Dividend King – a stock with 50 years of dividend increases under its belt. Fortis has one of the best dividend growth track records among Canadian companies, and it may be able to keep up its dividend growth in the future. As we saw in Fortis’ second-quarter earnings release, the company is still growing, and its payout ratio has been fairly stable over time. Currently, the company is guiding for 4% to 6% annual dividend increases all the way to 2028. If management executes on that, then shareholders will have plenty of reason to celebrate.
