Retirees and other dividend investors are searching for cheap dividend-growth stocks to add to their self-directed Tax-Free Savings Accounts (TFSAs) focused on generating reliable tax-free passive income. Fortis (TSX:FTS) has one of the best track records of dividend increases and now trades at a discount to its recent highs. Investors who missed the big rally in the stock after the 2020 market crash are wondering if Fortis is now undervalued again and good to buy.
Fortis stock price
Fortis (TSX:FTS) trades for close to $52.50 at the time of writing compared to the 12-month high of around $62 and as much as $65 at the peak in 2022.
The pullback is primarily due to interest rate hikes in Canada and the United States. Fortis operates $66 billion in utility assets and has a $25 billion capital program. The company uses debt to fund part of the growth initiatives. As such, the rising cost of borrowing reduces profits and cuts into cash that would be available for distributions.
Investors have also likely shifted to Guaranteed Investment Certificates (GICs) that now offer rates that are comparable to the dividend yield on dividend stocks like Fortis.
Upside?
At this point, the stock is probably oversold. The company delivered solid profit growth last year, with adjusted earnings per share rising to $3.09 from $2.78 in 2022. Fortis expects the capital investments to increase the rate base from $37 billion in 2023 to more than $49 billion in 2028. The resulting rise in revenue and cash flow should support planned annual dividend increases of at least 4%.
Fortis has additional projects under consideration that could get added to the capital program, and the company isn’t afraid to make strategic acquisitions to drive growth.
Is FTS stock a buy?
Volatility should be expected in the near term until there is a clear sign from the central banks that interest rates are headed lower. If inflation remains sticky and interest rates stay elevated, there could be more downside for the stock.
That being said, Fortis already looks cheap, and investors get paid a decent 4.5% dividend yield at the current share price. If you have some cash to put to work in a buy-and-hold TFSA, Fortis deserves to be on your radar today.
