Fortis (TSX:FTS) is up about 10% in 2024, but is off the recent high. Investors who missed the rally this year 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 dividend income and total returns.
Fortis stock price
Fortis trades near $60 per share at the time of writing. The stock has been in a range of $51 to $63 over the past year.
Most of the gains occurred in the past six months. This is largely due to interest rate cuts put in place by the Bank of Canada and the U.S. Federal Reserve. Fortis spends billions of dollars every year on its growth projects, and the company uses debt to fund part of the capital program. The jump in interest rates through 2022 and 2023 caused some concern for investors who worried that the higher debt expenses would cut into cash that could be paid out to shareholders. Higher borrowing costs can also potentially limit the number of new growth projects that get approved.
The drop in interest rates in Canada and the United States in recent months has reduced interest charges for variable-rate loans. Bond yields have also dropped from their 2023 highs. Lower debt expenses help boost profits and free up more cash for dividend payments or debt reduction.
Growth
Fortis operates utilities in Canada, the United States, and the Caribbean. The businesses include natural gas distribution utilities, power-generation facilities, and electricity transmission networks. Revenue from these businesses is largely rate-regulated, meaning Fortis enjoys predictable and reliable cash flow. This enables management to plan growth over several years.
Fortis is currently working on a $26 billion capital program that will raise the rate base from $38.8 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service, the extra cash flow should support ongoing dividend growth.
Fortis also has a long track record of making strategic acquisitions. The company hasn’t done a deal for several years. However, the drop in interest rates could spur a wave of consolidation in the utility sector.
Risks
Bond yields are moving higher again, even after the Bank of Canada’s latest rate cut and the anticipated next cut by the U.S. Federal Reserve. The concern in the market is that inflation has increased in the past couple of months and could continue to climb in 2025. If that occurs and the central banks are forced to halt rate cuts or even raise rates again, the utility sector would likely pull back again.
Dividends
Fortis recently raised the dividend by 4.2%. This is the 51st consecutive year the board has increased the distribution. Fortis plans to boost the dividend by 4% to 6% annually through at least 2029, supported by the capital program. The company has other projects under consideration that could get approved to boost the outlook for growth and dividend increases.
Investors who buy Fortis stock at the current price can get a dividend yield of 4%.
Is Fortis a buy today?
Additional downside is possible in the near term, depending on how the central banks act in the coming months. That being said, buy-and-hold dividend investors should be comfortable owning FTS stock at the current level and can look to boost the position on weakness.
