Fortis (TSX:FTS) is up about 9% in the past six months. Investors who missed the bounce 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.
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Fortis stock price
Fortis trades near $59 per share at the time of writing. The stock traded in a range of $51 to nearly $64 over the past year.
Interest rates have been the story since 2022 for this stock, rather than any specific operational issues.
The Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively in 2022 and 2023 to get inflation under control. Investors dumped utility stocks like Fortis during this cycle as they worried that the jump in debt expenses would cut into profits and reduce cash available for distributions.
Fortis spends billions of dollars on development projects, using debt to fund part of the growth program. As soon as the central banks signalled they were done raising interest rates in late 2023, investor sentiment shifted to expectations of rate cuts rather than fears of more rate hikes.
In the back half of 2024, the central banks started to reduce interest rates. This drove the rally in Fortis and other stocks in the utility sector.
Risks
Sticky inflation and a strong jobs market in the United States have forced investors to dial back rate-cut expectations for 2025. This is why Fortis has trended lower in the past month. Unemployment in the U.S. actually dropped in December and inflation has ticked higher for two months. With uncertainty around the potential inflationary impact of proposed tariffs in the United States in 2025, the central bank will likely put rate cuts on hold or could even be forced to raise rates later in the year if inflation increases toward the 3% level.
In that scenario, the utility sector would likely face new headwinds. Fortis and its utility peers could give back more of the 2024 gains.
Growth
Fortis has a $26 billion capital program on the go that will boost the rate base from $38.8 billion in 2024 to $53 billion in 2029. The resulting increase in cash flow as new assets go into service should support planned annual dividend increases of 4% to 6% per year over five years.
Fortis has other projects under consideration that could be added to the capital plan. The company also has a solid track record of making strategic acquisitions to drive additional growth.
Fortis raised the dividend by 4.2% for 2025 and has increased the payout annually for 51 consecutive years.
Is Fortis stock a buy today?
Near-term volatility should be expected, and a better entry point could be on the way in the coming months.
That being said, TFSA income investors with a buy-and-hold strategy should be comfortable taking advantage of the latest dip and could look to add to the position on further weakness. At the time of writing, Fortis offers a dividend yield of 4.2%.
