Fortis (TSX:FTS) operates 10 regulated natural gas and electric utility assets across Canada, the United States, and the Caribbean, serving 3.5 million customers. The company has been witnessing healthy buying over the last few months, with its stock price rising by 14.5% since the beginning of July. Given its capital-intensive business, the slashing of interest rates by central banks has increased investors’ optimism, driving Fortis’s stock price.
Now, let’s assess the buying opportunities in the stock by looking at its historical performances and growth prospects.
Fortis’s performances
Fortis is a diversified energy company, with around 93% of its assets involved in low-risk transmission and distribution businesses. So, its financials are less susceptible to market volatility. Supported by these stable and predictable financials, the company has returned 690% over the last 20 years at an annualized rate of 10.9%.
In the first two quarters of this year, the company’s net income has increased by 7.8% to $790 million. Higher earnings in Arizona amid new customer rates, rate base expansion, and the recognition of the new cost of capital parameters boosted its net earnings. However, the disposition of Aitken Creek and higher operating expenses offset some of the expansion. Now, let’s look at its growth prospects.
Fortis’s growth prospects
Having invested $2.3 billion in the first two quarters, Fortis is on track to make a capital investment of $4.8 billion this year. It has provided a new $26 billion five-year capital plan expanding from 2025 to 2029. The company expects to utilize around $6.7 billion of these investments to support energy transition, including interconnecting renewables to the grid, renewable storage, and cleaner fuel solutions.
This five-year capital investment plan could grow the company’s rate base at an annualized rate of 6.5% to $53 billion by the end of 2029, boosting its financials. So, the company’s management expects to raise its dividends by 4-6% annually through 2029. The company has strengthened its financial position by raising around $2.5 billion in long-term debt. Considering all these factors, I believe Fortis’s growth prospects look healthy.
Dividend and valuation
Supported by its highly regulated and low-risk businesses, Fortis generates stable and predictable cash flows, thus allowing it to raise its dividend consistently. Last month, the company announced a 4.2% increase in its quarterly dividend, marking 51 years of consecutive dividend growth. With this increase, the company would pay $0.615/share in the fourth quarter, translating into a forward dividend yield of 4.04%.
The Bank of Canada has slashed its benchmark interest rates four times since June, while the Federal Reserve of the United States has cut interest rates once. Falling interest rates and healthy second-quarter performance have boosted Fortis’s stock price over the last three months. Despite the recent increase, the company’s valuation looks reasonable, with its next-12-month price-to-sales and price-to-earnings multiples at 1.1 and 17, respectively.
Investors’ takeaway
The Canadian equity markets turned volatile last week as investors became nervous amid substantial stock gains over the previous few months. They are also worried about rising treasury yields and the ongoing Middle East conflict. So, I expect the equity markets to remain volatile in the near to medium term.
Given its low-risk transmission and distribution businesses, healthy growth prospects, and consistent dividend growth, I believe Fortis would be an excellent defensive bet in this uncertain outlook.
