Fortis (TSX:FTS) is up about 16% in the past six months. Investors who missed the rebound are wondering if Fortis stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend growth and total returns.
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Fortis stock
Fortis trades near $62 per share at the time of writing compared to a 12-month low around $51. The stock was as high as $65 in 2022 before aggressive interest rate hikes in Canada and the United States sent utility stocks into a downturn.
Fortis owns and operates $69 billion in utility assets across Canada, the United States, and the Caribbean. Businesses include power generation facilities, electric transmission networks, and natural gas distribution utilities. These are capital-intensive businesses that often require investments of billions of dollars to expand networks to accommodate demand growth. Fortis uses debt to fund part of the expenditures, so rising interest rates make borrowing more expensive. This is what occurred over the past two years. Higher debt expenses cut into profits and can reduce cash available for distributions.
Recent rate cuts by the Bank of Canada and the U.S. Federal Reserve kicked off the new rally in the stock. With inflation now below the 2% target in Canada and approaching 2% in the United States, rates are expected to continue to decline through next year. This should provide added support for Fortis stock.
Growth
Fortis has a good track record of growing through strategic acquisitions and investment projects. The current $26 billion five-year capital program is forecast to increase the rate base from roughly $39 billion in 2024 to $53 billion in 2029. As new assets go into service, the added revenue and cash flow is expected to support annual dividend increases of 4% to 6%. Fortis has other projects under consideration in Canada and the United States that could be added to the growth program to extend the outlook.
Management hasn’t completed a major acquisition for several years. As interest rates decline, consolidation should ramp up in the utility sector. Fortis could look for strategic opportunities, or might even become a target as alternative asset managers seek out businesses that generate reliable cash flow.
Dividends
Fortis just announced a 4.2% dividend increase. This marks 51 consecutive years of dividend hikes for investors. At the time of writing the stock provides a dividend yield of 4%. This is lower than other opportunities on the TSX, but the dividend growth steadily increases the yield on the original investment.
Fortis also offers a 2% discount for investors who use the dividends to buy new shares under the dividend reinvestment plan.
Should you buy Fortis now?
A near-term pullback in the broader market should be expected after the stellar run that occurred over the past year. That being said, Fortis pays a good dividend with solid distribution growth planned over the coming years. Existing investors should probably hold the stock at this level. New investors might want to consider taking a half position and look to add on any weakness.
