Fortis Inc (TSX:FTS) is one of Canada’s most reliable dividend stocks. It has a 4.2% yield today and has raised its dividend every single year for the last 50 consecutive years. Management aims to increase the dividend by 4% to 6% per year over the next five years. If Fortis can maintain its dividend growth going into the future, then its yield-on-cost will be much higher than the yield on shares bought today. In this article, I will explore Fortis’ business so that you can determine whether its shares are suitable for your portfolio.
Fortis is a regulated utility that provides heat and light to customers across Canada, the U.S., and the Caribbean. It has 10 separate utilities across these regions, serving 3.4 million customers. Ninety-eight percent of Fortis’ utilities are regulated, meaning that there are high barriers to entry in its market – providing a sort of economic moat. The company has $66 billion worth of high quality assets, making it a leading North American utility.
Fortis’ status as a regulated utility provides a significant amount of revenue stability. Utilities are basic life essentials, right up there with groceries. Most would rather sell their cars than go cold in the winter. Also, utilities are billed on a monthly recurring basis, providing additional stability on top of that provided by the “essential” nature of their services. So, utilities as a whole tend to have stable revenue. The question is, why is Fortis outperforming most of its peers? We’ll take a look at that in the next section.
One of the reasons why Fortis has outperformed its peers over the years is because it invests in growth. Over the last three decades, it has bought out utilities across North America and the Caribbean. Currently, it’s in the midst of a $25 billion capital expenditure program that it says will increase its rate base. Among other things, these capital expenditures will bring Fortis’ services to remote Northern communities previously not on the grid. These kinds of investments mark Fortis as being in a different league compared to other Canadian utilities. This can be seen in its most recent quarterly earnings release, which showed:
- $0.81 in earnings per share (EPS), up 19%.
- $0.84 in adjusted EPS, up 18%.
- $2.7 billion in liquidity, up 6.5%.
- $4 billion in liquidity that isn’t being utilized yet.
Overall, it was a good result, about in-line with what analysts expected. More importantly, growth in both revenue and EPS was positive, showing that Fortis’ growth efforts are paying off.
Dividend growth and safety
Last but not least, we can look at Fortis’ dividend track record. As mentioned previously, the company has raised its dividend every year for the last 50 consecutive years. This dividend track record is among the best of all TSX companies. In the last five years, the dividend has increased at about 4% per year. This is a slower rate of growth than seen in the 1990s, but still pretty good. The company’s payout ratio is 78%, which is well within the sustainable range. On the whole, Fortis’ dividend appears safe and well covered.