Fortis (TSX:FTS) stock has been one of the most predictable Canadian stocks that stably increased its profits over decades. For conservative investors who don’t want to be on wild roller-coaster rides, Fortis could be an invaluable long-term core holding in their diversified portfolios.
Although the year 2023 ended, its results for the fourth quarter have not been released yet. So, we can only backtrack results for the decade ending in 2022, during which the utility increased its adjusted earnings per share at a compound annual growth rate of about 5%.
For the 10-year period ending in 2023, it could be reporting earnings growth of approximately 6%. This healthy growth, along with its solid dividend, has driven total returns of just north of 9% per year in the last 10 years.
Fortis: A business you can count on delivering
Fortis is a regulated utility with diversified operations across 10 regulated utilities in Canada, the United States, and the Caribbean. Importantly, 93% of its assets are for transmission and distribution, which are essential services that are needed by its 3.4 million electric and gas customers through good and bad times of the economy. Indeed, Fortis has stood the test of time in delivering reliable business results through the economic cycle.
As a regulated utility, Fortis is allowed a set rate of return for its investments. Furthermore, for the foreseeable future, it has a low-risk capital plan of which only 18% are major projects. So, Fortis is set up to continue growing at a stable rate.
Currently, it has a $25 billion capital plan for 2024 to 2028, which management projects will grow its rate base from $36.8 billion in 2023 to $49.4 billion in 2028 for an annual growth rate of 6.3%, which aligns with its historical growth.
Fortis’s growth projects include investments in transmission, clean energy, system adaptation and resiliency, customer growth and economic development, and renewable fuel solutions and liquid natural gas. It’s funding this capital plan using a balanced approach — 55% from cash from operations, 34% from debt, and 11% from equity.
Fortis stock has been a reliable dividend grower as well, with dividend increases every year non-stop for half a century! Management forecasts dividend growth of 4-6% per year through 2028, which is supported by its capital program.
Where will Fortis be in five years?
To take an educated guess on where Fortis will be in five years, we need to know where it is now. At $55.04 per share at writing, Fortis stock trades at a price-to-earnings ratio of about 17.9. Compared to its historical levels, this is a relatively cheap multiple, which has to do with higher interest rates since 2022. We know that eventually, the Bank of Canada will cut rates, which will be a driver for higher stock prices in general.
Let’s be conservative and assume the stock grows its earnings per share by 4.5% per year over the next five years for a target price of about $68.59, assuming no valuation expansion. We can then approximate total returns of about 8.8% per year in this period after adding its dividend yield of 4.3%.
In conclusion, it’s not a bad time to pick up some Fortis shares, especially for passive income or conservative investors who want minimal portfolio management.
