Is Fortis (TSX:FTS) stock a buy? It depends on what your expectation of the stock is. Below, I’ll illustrate the kind of stock that Fortis is.
As a regulated utility with diversified operations across North America, Fortis earns predictable and resilient earnings through the market cycle. For example, over the last 20 years or so, it only saw adjusted earnings per share decline in about four years, with three of those declines at about 1% and the last one at 6%. It recovered these earnings declines by the next year.
Even when the stock declines meaningfully, typically, it’s able to recover within a reasonable amount of time. For instance, the utility stock fell close to 25% from peak to trough in 2022 in about five months. After that, it rallied 30% from trough to peak in the subsequent seven months or so. The stock saw another decline of about 18% from May to October from this peak to the next bottom. And it appears to be stabilizing.
In other words, when Fortis stock falls too much, investors buy into the quality company. So, as long as investors target to buy low and are not in a rush to sell out of the position, they have a good chance to make money in the stock.
During the last two bottoms mentioned above, the dividend stock yielded about 4.9% and 4.8%, respectively. Although there were higher yields available in other stocks, investors still chose to pick up shares in the blue-chip stock for the relatively high dividend yield in comparison to the stock’s usual dividend yield of about 4% or lower.
That is because, from a business standpoint, Fortis stock has below-average risk. As discussed earlier, it has quality earnings. Furthermore, it is a top dividend stock that has paid an increasing common stock dividend for close to half a century! So, investors count on it to increase its payout, essentially, perpetually. For your reference, its three-, five-, and 10-year dividend-growth rates are approximately 6%. Its payout ratio is estimated to be sustainable at about 75% of its adjusted earnings this year.
Its last dividend hike in September was 4.4%. Going forward, in a higher interest rate environment, it still forecasts dividend growth of 4-6% through 2028. Seldom do companies provide dividend guidance that stretches so far into the future, which shows how confident management is about the company and how defensive and predictable its business is.
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Should you buy Fortis stock?
At $55.66 per share at writing, analysts think the stock is fairly valued. Let’s be conservative and assume a 4% earnings growth rate. Combined with its dividend yield of 4.2%, an investment today can drive total returns of about 8.2% per year through 2028.
Conservative investors, especially, ones looking to add a stabilizer for their diversified portfolios, can consider Fortis if they find the expected total returns of about 8% acceptable. Otherwise, cautious investors who are interested can seek to buy the stock on dips. In a higher interest rate environment, investors might just get another chance to buy the stock at a yield of north of 4.8%, which represents a buy target of $49.17 based on the current annualized payout of $2.36 per share.
