Few stocks in the market can offer defensive appeal and higher dividends than utility stocks. Investing in these companies can be fruitful in the long run, as investors can relax and witness their capital grow. One such company is Fortis (TSX:FTS), a Canadian giant in the utilities space.
Here’s why I think Fortis could be the overlooked dividend stock investors need in their portfolios right now.
A business model worth owning
Fortis’s core business model involves the transmission and distribution of regulated electricity and natural gas to more than 3.4 million customers in North America and the Caribbean. The company owns and operates more than 10 utility transmission and distribution assets and is among the most notable Canadian players in this field.
With a long-term track record of providing stable services to its clientele, Fortis has built up a solid revenue stream with captive markets. Accordingly, from a cash-flow perspective, Fortis remains among the most consistent stocks on the TSX worth considering. Notably, the company has passed on these cash flows to investors via dividends over time, posting 50 consecutive years of dividend increases.
Financial picture
Sticking with the financial narrative, let’s dive into Fortis’s recent numbers.
Fortis currently carries a market capitalization of just over $26 billion and a dividend yield of 4.4%. The company generates strong free cash flow of around $3.5 billion per year, so its valuation on a price-to-cash flow basis is strong. However, due to Fortis’s massive debt pile (similar to many utilities players due to the capital-intensive nature of this business), the company’s free cash flow numbers are negative. This has been a concern for many for some time.
That said, Fortis continues to make the appropriate capital improvements to its core infrastructure, and its dividend remains well covered by its operating cash flow. So long as the company is able to pay down its debt pile over time (potentially reducing the scale of dividend hikes moving forward), the stock could be rewarded and investors could see capital-appreciation upside as well. Time will tell in this regard.
Why is Fortis a buy?
Fortis remains among the best long-term assets worth holding on the TSX, in my view. So long as the company can continuously raise prices for existing customers (which can be a challenge at times due to the company’s regulated operations), this is a stock that can certainly thrive. Fortis provides an essential service and has the track record and management team to keep the ball moving forward.
There are some concerns with this company, and its balance sheet certainly needs some attention. But for those who view Fortis as a multi-year (or even multi-decade) investment, there’s a lot to like with this name.
