I’ve been sitting on the sidelines, waiting for Fortis (TSX:FTS) stock to dip into the mid-$40 range before buying it. I continue to wait, forgoing the over 4% dividend yield. I have a great opinion of the company, and I don’t think you can really go wrong buying it today. Yet, I’m patiently waiting. But is Fortis stock actually a buy today at $55?
Fortis stock is the picture of stability
Fortis is a $27.6 billion utility giant with a diverse geographic footprint and asset mix. This means that the company has a revenue profile that’s regulated. In turn, this translates into steady, secure, and predictable revenue — qualities that are highly valuable.
All of this has resulted in an impressive history for Fortis stock in two regards: its dividend and its stock price performance. Firstly, Fortis’s stock price has been a rock in the last few decades. As you can see in its price graph below, Fortis stock has returned over 600% since the year 2000. Just as importantly, its climb higher has been relatively calm and steady — predictable, you might say.
Secondly, Fortis has been a top dividend stock that has provided its shareholders with impressive returns. In fact, its dividend has been raised for 50 consecutive years and is expected to increase at a compound annual growth rate of 6% through to 2028.
Latest earnings result beats expectations
Fortis’s third-quarter (Q3) 2023 earnings result showed a continuation of the trends we have seen: strong earnings and cash flow growth. In fact, adjusted earnings per share (EPS) increased 18% to $0.84, and operating cash flow of $940 million was up 48%. This result was ahead of expectations that were calling for EPS of $0.81.
These results reflected continued rate increases as well as population growth and new cost-of-capital parametres at FortisBC.
Fortis stock’s valuation
Turning to valuation, Fortis stock trades at 18 times earnings. This compares favourably to its peer group, which is trading at over 30 times earnings. Looking ahead, Fortis is trading at 17.5 times expected 2024 EPS. This compares to an earnings-growth rate of just over 3%. Clearly, there’s a premium being paid for the stability and reliability of Fortis’s business.
The one thing about Fortis that I believe we should closely monitor is its debt levels. With a debt-to-capital ratio of 56.3%, we can see that the debt load is heavy. This is typical of utility companies, but in this interest rate environment, this can sting more than usual. Debt maturities will need to be refinanced at higher interest rates, thus bringing Fortis’s interest expense higher. In fact, Fortis’s interest expense has been steadily rising over the last few quarters, from $279 million in Q4 2022 to $326 million in Q3 2023. This represents a 17% increase.
Fortis currently has $765 million in cash and cash equivalents on its balance sheet as well as $4 billion in unused credit facilities. So, liquidity looks favourable. However, Fortis’s five-year capital plan, which totals $25 billion in expected spending, is a significant one.
The bottom line
The new world of higher interest rates will negatively affect heavily indebted companies like Fortis. I need to feel that the new, higher cost of capital that the company faces is reflected in Fortis’s stock price before I actually buy the stock. So, I continue to wait for a more attractive entry point.
