Fortis (TSX:FTS) is down nearly 15% from the 2022 high. Investors who missed the rally after the 2020 crash are wondering if Fortis stock is now undervalued again and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
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Fortis stock price
Fortis trades near $52 at the time of writing compared to $62 last spring.
The dip is primarily due to rising interest rates in Canada and the United States. As rates increase, debt costs go up, and this can have a negative impact on profits. Income investors might also have exited the stock in favour of Guaranteed Investment Certificates (GICs) that briefly saw rates offered as high as 6% last year.
The latest dip in the share price is due to investor concerns that strong labour markets and persistent inflation will force the Bank of Canada and the U.S. Federal Reserve to keep interest rates elevated for longer than previously expected. This could trigger a deep recession if debt strains on households cause spending to fall off a cliff.
Economists broadly expect the economy to go see a soft landing as inflation gradually declines and the central banks ease up on rates. The next few months, however, will likely be a bit turbulent until there is more clarity on when the central banks might begin to cut rates.
Earnings
Fortis delivered solid results in 2023. The company generated $1.5 billion in adjusted net earnings in 2023, up $173 million from 2022. Adjusted earnings rose $0.31 per share to $3.09.
Fortis is working on a $25 billion capital program that will drive the midyear rate base from $37 billion in 2023 to $49.4 billion in 2028. The resulting increase in cash flow should support planned annual dividend growth of at least 4% over the next five years. This is good guidance in an uncertain economic environment.
Fortis gets nearly all of its revenue from rate-regulated businesses. These include power-generation facilities, electric transmission networks, and natural gas distribution utilities. Households and businesses need to keep the lights on and heat the building, regardless of the state of the economy, so Fortis should be a good stock to own through an economic downturn.
Dividends
Fortis raised the dividend in each of the past 50 years. Investors who buy the stock at the current level can get a 4.5% dividend yield and wait for future increases to drive up the return on the initial investment.
Should you buy FTS stock now?
Investors who already own Fortis should probably ride out the turbulence. New investors might want to start nibbling at this level and look to add to the holdings on any additional downside. Buying Fortis on big pullbacks has historically proven to be a savvy move for patient investors. As soon as interest rates begin to fall, this stock could catch a nice tailwind.
