Fortis (TSX:FTS) is down more than 15% from the 2022 high. Investors with a contrarian strategy for building retirement wealth are wondering if FTS stock is now undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio targeting dividends and total returns.
FTS stock price
Fortis trades near $53.50 at the time of writing. The stock is off the 2023 low, around $50, but it is still down considerably from the $64. The stock topped at its peak in 2022.
Weakness in the share price over the past two years is largely due to the impact of aggressive interest rate hikes by the Bank of Canada and the U.S. Federal Reserve. The central banks raised rates to cool off the economy and lower inflation from more than 8% back to the target of 2%. The December 2023 inflation reports in the two countries came in around 3.4%, so there is still work to be done, but markets are starting to bet that the next moves from the central banks will be cuts.
Fortis uses debt to fund part of its capital program, which currently stands at $25 billion. Higher borrowing costs reduce profits and can cut into cash flow that is available to pay dividends. The pullback in the share price, however, is probably overdone. Despite the rate-hike headwinds, Fortis says the capital program will grow the rate base by a compound annual rate of about 6% through 2028. The resulting boost to revenue and cash flow is expected to support planned annual dividend increases of at least 4% over the next five years. That’s great guidance in the current economic environment. Fortis has increased the dividend annually for the past 50 years, so investors should feel comfortable with management’s target for distribution growth. At the current share price, investors can get a 4.4% dividend yield.
Fortis gets most of its revenue from rate-regulated assets that include power-generation facilities, electric transmission networks, and natural gas distribution utilities. These are reliable and stable through most economic conditions, making Fortis a good stock to own during a recession.
A number of new capital projects are under consideration that could get the green light and drive revenue and cash flow growth in the next few years. Fortis also has a good track record of making successful strategic acquisitions to boost growth. The company hasn’t done a big deal for several years, but it isn’t shy about taking advantage of opportunities that arise.
Should you buy Fortis now?
A quick look at the company’s stock performance over the long haul suggests that buying Fortis on dips tends to deliver solid returns for patient investors. Investors who buy now can get a decent dividend yield and simply wait for the distribution growth to raise the return on the initial investment.
If you have some cash to put to work in a self-directed RRSP, Fortis deserves to be on your radar today.
