Fortis Inc (TSX:FTS) is one of Canada’s best-performing dividend stocks. Having raised its dividend every year for 60 years running, it has stood the test of time. What’s really amazing is that this has occurred without a big increase in the company’s payout ratio. Fortis’ payout ratio – which is defined as dividends/profit – has consistently hovered between 65% and 80%. It’s currently at the upper end of that range (78%), but is not breaking new highs.
So, Fortis looks like a pretty stable and reliable company. But is that enough to make its stock a buy? Although utilities are usually considered “value” stocks, FTS is not actually “deep value,” trading at 18 times earnings and 2.3 times sales. Those might look like “value stock” multiples to you, but I’ll remind you that when Ben Graham wrote The Intelligent Investor back in 1949, it was possible to find companies trading for less than a single year’s worth of profit!
So, Fortis is not really all that cheap – it’s less expensive than the S&P 500, though, while having a respectable amount of growth. In this article, I will explore the topic of whether Fortis stock is still a buy after its many decades-long track record of outperforming the TSX Index.
Fortis’ valuation
At today’s prices, Fortis stock is basically cheap, but not extremely so. Using yesterday’s closing price, it trades at the following multiples:
- P/E: 18
- Price to sales: 2.3
- Price to book: 1.3
- Price to cash flow: 7.3
These multiples are about average for the TSX. In other words, investors think that Fortis stock is about as risky and has as much future profit as, the broader market. This is a fair assumption to make, as Fortis’ 11.8% CAGR return over the last five years is comparable to that of the S&P 500. It’s a little better than the TSX’s return, as the TSX Index has not done as well as the S&P 500. So, we have Fortis here trading at “average to below average” multiples. Now let’s see if the company itself is doing well enough to justify such a valuation.
Financial performance
Fortis performed pretty well as a company in the trailing 12-month period:
- Revenue of $11.8 billion increased 12.8% year over year.
- Operating income of $3.13 billion increased 15.5%.
- Net income of $1.56 billion increased 15.5%.
- EPS of $3.09 increased 6.1%.
As you can see, it was a decent showing. The 6% growth rate is enough to support FTS’ planned dividend increase (4% to 6% over the next five years), without pushing the payout ratio higher than it is now. The company’s margins are also healthy, with a 26.5% EBIT margin and a 51.4% net margin.
Will Fortis be able to keep up these results? Past history suggests that it will be able to: the company has been delivering moderate growth since the 1970s. Like all utilities, Fortis enjoys stable, recurring revenue. Unlike many other utilities, it invests heavily in growth, which has enabled its long term outperformance of its sector. As long as this approach continues, Fortis will do well.
Foolish takeaway
Is it too late to buy Fortis stock? Though FTS has risen a lot over the decades, I think the answer to that question is ‘no.’ The company still produces the kinds of fundamentals that would justify buying it.
