Fortis (TSX:FTS) is up about 19% from the 2024 low. Investors who missed the rebound are wondering if FTS stock is still undervalued at the current share price and good to buy for a self-directed portfolio focused on dividends and total returns.
Operations
Fortis is a Canadian utility company with roughly $69 billion in assets located in Canada, the United States, and the Caribbean. The businesses include natural gas distribution utilities, electricity transmission networks, and power generation facilities. Building or buying these types of assets is capital intensive, and Fortis uses debt to fund part of its growth program. Rising interest rates in the back half of 2022 and through the first three quarters of 2023 largely contributed to the negative pressure on utility stocks as investors worried that higher borrowing expenses would reduce profits and cut into cash that could be used to pay dividends. Fortis wasn’t spared the pain. The stock fell from $65 in 2022 to as low as $50.
Now that the Bank of Canada and the U.S. Federal Reserve are cutting interest rates in an effort to maintain a steady economy, utility stocks are back in favour.
Growth
Fortis is working on a $26 billion capital program and has additional projects under consideration. A decline in borrowing costs could be enough incentive for management to give new investments the green light. As it stands, Fortis already expects the current capital plan to raise the rate base from $38.8 billion in 2024 to $53 billion in 2029. This should result in higher revenue and cash flow generation to support targeted dividend growth of 4-6% per year over the five-year timeframe. Fortis raised the distribution in each of the past 51 years, so investors should be comfortable with the dividend-growth guidance.
Fortis hasn’t made a large acquisition for several years. With interest rates declining, mergers and acquisitions in the utility sector could pick up over the medium term. Fortis has a strong track record of successfully integrating new businesses into the portfolio. Given the growth outlook for the company and the reliable cash flow, it also wouldn’t be a surprise to see Fortis become a target for a large alternative asset manager seeking to deploy some capital.
Risks
Bond markets sold off in recent weeks, driving up bond yields. Traders appear to be concerned that a resilient U.S. labour market and a steady economy will force the U.S. Federal Reserve to slow down its pace of rate cuts in an effort to avoid stoking a surge in inflation. New tariffs under the incoming Trump presidency might also drive up prices across the American economy. In that scenario, utility stocks could come under renewed pressure if markets walk back expectations for rate cuts.
Is Fortis good to buy now?
Investors should be comfortable owning Fortis today and could look to add to a position on any weakness. The dividend growth pays you well to ride out some turbulence and buying Fortis on dips has historically proven to be a savvy move for patient long-term investors. If you have some cash to put to work, this stock deserves to be on your radar.
