Fortis (TSX:FTS) is up about 9% in recent weeks. Investors who missed the bounce are wondering if FTS stock is still undervalued 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.
Fortis stock price
Fortis trades near $56 per share at the time of writing compared to $51 last month. The stock fetched around $64 two years ago, so there is decent upside potential on a continued rebound.
Interest rate hikes by the Bank of Canada and the U.S. Federal Reserve are largely to blame for the pullback in the price of the stock over the past 24 months. The central banks raised interest rates to slow down the economy as a method to reduce upward pressure on wages and prices. Inflation was above 8% in both countries in June 2022. The cooling efforts have had the desired effect. April 2024 inflation came in at 3.4% in the United States and 2.7% in Canada.
Fortis uses debt to fund part of its growth program. Higher borrowing costs eat into profits and can potentially make some projects unprofitable. A jump in debt expenses also reduces cash that can be paid out as distributions to shareholders. This might be why many investors moved out of utility stocks like Fortis in favour of Guaranteed Investment Certificates (GICs) that finally offered attractive rates with no risk.
Economists broadly expect the Bank of Canada and the U.S. Federal Reserve to start cutting interest rates in the second half of 2024 to avoid pushing the economy into a recession. Inflation remains above the 2% target but is trending in the right direction.
Once the central banks start to cut rates there could be a surge of cash back into Fortis and other utility stocks as debt expenses decline and rates paid on GICs begin to fall.
Growth outlook
Fortis is working on a $25 billion capital program that is expected to boost the rate base from $37 billion in 2023 to more than $49 billion in 2028. The resulting increase in revenue and cash flow should support planned annual dividend hikes of 4-6%. Fortis has other projects under consideration that could be added to the development program. In addition, the company has a strong track record of making strategic acquisitions to drive growth.
Dividends
Fortis has raised its dividend in each of the past 50 years. Investors who buy FTS stock at the current level can get a 4.2% dividend yield.
Should you buy Fortis now?
Ongoing volatility should be expected until the central banks actually start trimming interest rates. That being said, Fortis looks attractive at the current price, and investors get paid a decent dividend to ride out any additional turbulence. If you have some cash to put to work, this stock deserves to be on your radar.
