Fortis Stock – Buy, Sell, or Hold?

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Fortis Inc (TSX:FTS) is a Canadian utility stock that is famed the world over for its stability and stable dividend. The company has been paying dividends ever since 1973, and has raised its dividend every year since then. This 50-year track record of dividend increases makes Fortis Canada’s one and only dividend king.

Fortis stock is generally very popular with Canadian dividend investors. It’s not hard to see why. The company’s revenue and earnings have been steadily climbing over the years. The FTS dividend has also climbed, yet still only has a 72% payout ratio. Several of Fortis’ peer companies have payout ratios above 100%.

Clearly, Fortis stands out from the pack, whether that’s the TSX as a whole or its peer group. In this article, I will attempt to determine whether Fortis’ spectacular results are enough to make its stock a buy.

Earnings performance

Fortis’ earnings results have generally been pretty good over the years. As an example, we can look at the most recent quarterly earnings release. In the third quarter, Fortis delivered:

  • $394 million in net earnings, up 21%.
  • $0.84 in adjusted earnings per share (“EPS”), up 18.3%.
  • A 3% increase in capital expenditures (a positive in this context because these expenditures are going toward an increasing Fortis’ rate base).
  • $2.7 billion in revenue, up 5.9%.

Overall, it was a decent quarter. Revenue missed estimates but adjusted earnings beat slightly. If Fortis can keep delivering results like this in the future, then its stock price and dividend should both rise. Speaking of which, here are Fortis’ five-year CAGR growth rates in revenue, operating earnings, and diluted EPS:

  • 7.3% in revenue
  • 5.8% in operating earnings
  • 6.1% in EPS

Pretty respectable numbers. Overall, Fortis stock has performed admirably over the long term.

Dividend sustainability

Now that we have explored Fortis’ recent performance and growth, we can turn to its dividend – specifically, its dividend’s safety metrics. It’s always nice to have a stock that claims to offer you a lot of income, but if the dividend gets cut, it means nothing. Dividend safety metrics are used to determine whether a company will continue paying dividends long term.

Fortis scores high marks here. In its most recent quarter, Fortis had $0.83 in earnings per share. Dividends per share came in at $0.565. That implies a 68% payout ratio for the third quarter – not bad at all. Using trailing 12-month earnings and dividend figures, Fortis says its payout ratio is 72%. Also not bad.

Foolish takeaway

The bottom line on Fortis is that it’s still the same dependable old moderate growth utility stock that investors have come to know and love over the years. FTS is reasonably inexpensive, at 18.1 times earnings. The stock has some growth. It pays a 4.2% dividend. On the whole, you could do much worse than to invest in Fortis.

That’s not to say that you could invest all of your money in Fortis, of course. As with all stocks, it should only be held as part of a diversified portfolio. But if you’re looking for a new addition to your dividend portfolio, FTS couldn’t hurt.

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.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy

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