Should You Buy Fortis While it’s Below $60?

Fortis is off the 12-month high. Is it time to buy?

| More on:
The sun sets behind a power source

Source: Getty Images

Fortis (TSX:FTS) recently gave back some of the big gains it racked up in the second half of 2024. Investors who missed the rally last year are wondering if FTS stock is now 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 share price

Fortis trades near $58.50 at the time of writing. The stock is down about 8% from the 12-month high but is still up more than 8% over the past six months.

Interest rate changes in Canada and the United States have largely driven the movements in the share price over the past two years.

In 2022 and 2023, the Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively to get inflation under control. Higher interest rates lead to more expensive borrowing costs. Fortis and other utilities grow through investments in large capital projects that can cost billions of dollars and sometimes take years to complete. Debt is used to fund the projects until they are completed.

A jump in debt expenses cuts into profits and can reduce the cash that is available for distributions to shareholders or for debt reduction. Higher borrowing costs can also force a company to put some projects on hold, potentially limiting growth.

The rally in Fortis that occurred in the second half of 2024 coincided with rate cuts in Canada and the United States. Falling rates tend to be good for utility stocks.

Risks

Strong jobs data, sticky inflation, and uncertainty around tariffs in the United States could force the U.S. Federal Reserve to put rate cuts on hold in 2025. Some analysts think the American central bank might even raise rates again before the end of 2025 or in 2026.

In Canada, the argument for more rate cuts is stronger, but the Bank of Canada would likely slow the pace of rate reductions if the American central bank stopped cutting rates. Surging bond yields in both countries in the past few weeks suggest the market expects fewer cuts than previously anticipated. This is the reason Fortis has pulled back over the past two months. More downside could be on the way.

Opportunity

Fortis is working on a $26 billion capital program that will raise the rate base from roughly $39 billion in 2024 to $53 billion in 2029. As the new assets go into service, the company expects cash flow to rise enough to support planned annual dividend increases of 4% to 6%.

Fortis has increased the distribution in each of the past 51 years, so investors should feel comfortable with the guidance. At the time of writing, the stock provides a dividend yield of 4.2%.

Fortis has other projects under consideration that could get added to the backlog. In addition, Fortis has a good track record of making strategic acquisitions.

Time to buy?

Near-term volatility should be expected as the market sorts out its expectations for interest rates over the next couple of years. That being said, income investors should be comfortable holding Fortis at this level and might look to add to the position on further downside. The dividend is attractive and should continue to grow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

woman retiree on computer
Dividend Stocks

Should You Buy Telus Stock at $20?

Down 40% from all-time highs, Telus is a beaten-down TSX dividend stock that trades at a discount to consensus price…

Read more »

top TSX stocks to buy
Dividend Stocks

Here’s Exactly How $15,000 in a TFSA Could Grow Into $200,000

Canadians with sizeable TFSA balances today have utilized the full potential of the investment vehicle.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

Don't get complicated. Consider this Canadian stock as a long-time buy.

Read more »

Man data analyze
Dividend Stocks

A Top-Performing U.S. Stock That Canadian Investors Really Should Own

This top US tech stock is something you cannot miss out on, and there’s another from Canada that you need…

Read more »

how to save money
Dividend Stocks

3 Premium TSX Dividend Stocks Worth Loading Up On

These three premium TSX dividend stocks remain among the best bets for long-term investors seeking stable total returns.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

3 Canadian Dividend Stocks Perfect for Retirees

These three Canadian stocks are ideal for retirees.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Should You Buy Goeasy Stock While It’s Below $170?

Goeasy stock still looks like a winner, so why is the stock price down below $170?

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Maximizing Your TFSA: Smart Investment Moves for 2025

Stocks like Enbridge provide significant dividend income, which is ideal for tax-savings within your TFSA.

Read more »