Fortis (TSX:FTS) gave up some of its 2024 gains over the past two months. Investors who missed the rally in the second half of 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.
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Fortis share price
Fortis trades near $60.50 at the time of writing. The stock is down from $63 in November last year but is still well above the 12-month low of around $51.
Fortis was as high as $65 in the spring of 2022 before the Bank of Canada and the U.S. Federal Reserve started to aggressively hike interest rates in order to get inflation under control. The steep rise in borrowing costs that occurred in the second half of 2022 and through most of 2023 caused concern among utility investors. The market worried that soaring debt costs would put pressure on Fortis and other utilities that carry large debt positions on their balance sheets. These companies use debt to fund their growth initiatives. As interest expenses rise, profits and cash that can be used for dividends or debt reduction decline.
Fortis saw its stock fall as low as $50 in late 2023. At that point, the central banks indicated they were done raising interest rates. Market sentiment then shifted from fears of more hikes to expectations of rate cuts in 2024. As soon as the Bank of Canada and the U.S. Federal Reserve started reducing rates in the back half of 2024, Fortis and its utility peers picked up a nice tailwind.
Risks
The pullback that occurred in the past couple of months is due to new concerns regarding the direction of interest rates. Markets had previously anticipated three or four cuts in 2025 in the United States. Now, there is a chance the U.S. central bank will put rate cuts on hold or could even be forced to raise rates again before the end of the year if inflation starts to rise. The American economy remains in good shape, and unemployment is low. If Donald Trump implements widespread tariffs, there could be a surge in inflation as businesses pass the extra costs on to consumers.
In the event that rate cuts go on hold or rates move higher in the United States, Fortis and other stocks in the utility sector could face more headwinds.
Opportunity
Fortis is 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 there should be an adequate increase in revenue and cash flow to cover planned annual dividend increases of at least 4% years. Fortis bumped up the dividend in each of the past 51 years.
At the current share price, investors can get a dividend yield of 4% from Fortis.
Should you buy now?
Near-term volatility should be expected until there is more clarity on the outlook for interest rates in the coming 12-18 months. That being said, Fortis deserves to be on your radar at this level. Any downside would be considered an opportunity to add to the position. Buying Fortis on large pullbacks has historically proven to be a savvy move for patient investors.
