Did you know that Fortis (TSX:FTS) stock has a 4.42% dividend yield? That yield means that if you invest $100,000 in the stock, you get $4,420 in annual cash back, assuming the dividend doesn’t grow. Historically, Fortis’s dividend has grown. In fact, it has grown for 50 years straight, making FTS stock one of Canada’s few Dividend Kings. If historical trends persist, then $4,420 is actually a low estimate of how much an investor buying $100,000 worth of Fortis shares will get back in annual passive income.
The question is, can we expect Fortis’s historical trend to persist? History is replete with examples of companies that seemed to be doing well only to reverse course and enter terminal decline. Fortis’s long-term track record is extremely good, but we need more than that to know whether the company’s stock is a buy. In this article, I’ll review several factors you will need to look at in order to determine whether FTS stock is suitable for your portfolio.
Competitive position
Fortis’s competitive position is very strong. Its utilities across Canada, the U.S. and the Caribbean are regulated utilities, which means they are protected from competition. It’s not that other companies aren’t allowed to enter the market, it’s just that the market is so regulated than the incumbent becomes “enmeshed” with the government. It becomes hard for competitors to enter the market, which protects Fortis’s margins.
Earnings performance
Fortis has generally performed well in its earnings releases, frequently beating analyst estimates and delivering positive growth. In its most recent quarter, it delivered the following:
- $394 million in net income, up 20%
- $411 million in adjusted net income, up 20.5%
- $0.81 in reported earnings per share (EPS), up 18%
- $0.84 in adjusted EPS, 18.3%
- $1.08 billion in capital expenditures, up 16%
Overall, the company’s third-quarter earnings were satisfactory. As for the long-term average growth rates (five-year compounded), some highlights include the following:
- 7.3% in revenue
- 6.37% in earnings before interest, taxes, depreciation, and amortization
- 5.81% in operating income (earnings before interest and taxes)
- 6.1% in diluted EPS
Overall, these are good results — enough to support the 4-6% annualized dividend increases that Fortis has planned going forward.
Valuation
Last but not least, we have Fortis’s valuation. At today’s prices, Fortis stock trades at the following:
- 17.3 times earnings
- 2.2 times sales
- 1.31 times book value
- 7.2 times operating cash flow
It is definitely not the most expensive stock out there. You could argue that with its “so-so” growth rates, Fortis is fairly valued. But it’s definitely not extremely overvalued.
Foolish takeaway
Fortis is a stock that has stood the test of time. With 50 years of dividend increases under its belt, it has become one of Canada’s very own Dividend Kings. There aren’t very many stocks with that distinction, but Fortis has earned it. To be sure, this stock is not the fastest-growing or most exciting out there. But then again, in investing, it’s often the boring approach that works out the best in the end. If you buy Fortis stock today, you’ll probably enjoy rising dividends for at least the next five years and maybe even several decades. On the whole, it is definitely a stock worth owning.
