Fortis (TSX:FTS) is up 15% in the past six months. Investors who missed the rebound 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) portfolio focused on dividends and total returns.
Fortis stock price
Fortis trades near $63 per share at the time of writing compared to $52 at one point in June. The stock has recovered most of the losses incurred through 2022 and 2023 when rising interest rates stoked fears that higher borrowing costs would eat into profits and reduce cash available for dividends.
With inflation back near target levels, the Bank of Canada began reducing interest rates this summer and the U.S. Federal Reserve started to cut rates in recent months. This has provided a good chunk of the support for the move higher in Fortis stock through the second half of 2024.
Operations
Fortis is a utility company with 10 regulated utility businesses spread out across Canada, the United States, and the Caribbean. The operations include natural gas distribution, power generation, and electricity transmission. Nearly all of the revenue comes from rate-regulated utilities. This means cash flow should be predictable and reliable.
Fortis has historically grown through a combination of strategic acquisitions and development projects, although the company hasn’t made a large acquisition for several years. Falling interest rates, however, could spark a new wave of consolidation in the utility sector as borrowing becomes cheaper. On the development side, Fortis is currently working on a $26 billion capital program that is expected to boost the rate base from $38.8 billion in 2024 to $53 billion in 2029.
Dividends
As the new assets are completed and go into service, the company should see revenue and cash flow increase enough to support planned annual dividend hikes of 4-6% over the next five years. Fortis has other projects under consideration that could be added to the capital program. This would potentially extend the dividend-growth outlook or increase the size of the annual dividend increases.
Fortis recently raised the dividend by 4.2%, marking the 51st consecutive annual increase to the distribution. Investors who buy Fortis stock at the current price can get a dividend yield of 3.9%.
Risks
Bond yields have drifted higher over the past two months despite the rate cuts. This suggests that markets are scaling back expectations for the size and speed of additional rate cuts in the coming months. Higher inflation in the U.S. and Canada in October is part of the reason. Markets in the U.S. are also concerned about the potential inflationary impact of Donald Trump’s proposed tariffs next year. If inflation continues to drift higher, the central banks might be forced to pause or even reverse the cuts to interest rates. In that scenario, Fortis and other utility stocks could come under renewed pressure as borrowing costs increase.
The bottom line on Fortis stock
Near-term turbulence could be on the way, but buy-and-hold investors should be comfortable holding Fortis at the current level. The company’s dividend-growth plan should be solid, and investors should see good total returns in the long run. If you have some cash to put to work in a self-directed TFSA or RRSP, Fortis deserves to be on your radar.
