Fortis (TSX:FTS) is a Canadian company that operates 10 regulated utility assets. It serves the electric and natural gas needs of 3.5 million customers in the United States, Canada, and the Caribbean. Around 93% of its assets are involved in regulated transmission and distribution business, lowering its risk profile and delivering stable and predictable financials.
Supported by these healthy financials, the utility company has provided an average annual total shareholder return of 10.1% in the last 20 years, outperforming the broader equity markets. However, its annualized returns in the previous three years have halved to just 5%. Given its capital-intensive business, rising interest rates have hurt its financials, thus dragging its stock price down. So, let’s assess its recent performances and growth prospects to determine whether Fortis is a buy at these levels.
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Fortis’s financials and growth prospects
Fortis made a capital investment of $3.6 billion in the first three quarters of 2024, expanding its asset base. Asset base expansion, higher earnings in Arizona, and unrealized gains on derivative contracts boosted its net income, which grew by 7.6% to $1.21 billion in the first nine months of 2024. Meanwhile, with no adjustments to its net earnings, its adjusted net income stood at $1.21 billion or $2.45 per share, representing a 3.6% increase from $2.37 in the previous year.
After investing $3.6 billion in the first three quarters, the St. John’s-based company was on track to meet its capital investment target of $5.2 billion in 2024. Further, the company has adopted a five-year capital investment plan and expects to invest $26 billion from 2025 to 2029. These investments could grow its rate base at an annualized rate of 6.5% to $53 billion by 2029. Along with these expansions, the company’s improving operating efficiency and favourable rate revisions could continue to drive its financials and cash flows in the coming years.
Meanwhile, the company expects to meet 70% of its projected capital investments through cash generated from its operations and dividend reinvestment plan. So, these investments would not substantially raise its debt levels. Amid these growth prospects and healthy financial position, Fortis’s management expects to increase its dividends by 4-6% annually through 2029.
Investors’ takeaway
Since June 2024, the Bank of Canada has cut its benchmark interest rates four times, while the United States Federal Reserve has slashed three times. Both the central banks could continue with their monetary easing initiatives this year. Falling interest rates have improved investors’ sentiments, thus driving Fortis’s stock price higher. The company’s stock price has increased by 13% in the last 12 months. Despite the recent increase in its stock price, the company trades at a reasonable valuation, with its NTM (next-12-month) price-to-earnings multiple at 18.4.
Fortis also rewards its shareholders with consistent dividend growth. It has increased dividends uninterruptedly for 51 years and currently offers a healthy dividend yield of 4.06%. Given its stable cash flows from regulated assets and healthy growth prospects, the company could maintain its dividend growth in the coming years.
Amid uncertainty over the impact of proposed tariffs on imports to the United States, I expect the Canadian equity markets to remain volatile in the near term. Given this uncertain outlook, I believe Fortis would be an excellent buy with its stable cash flows and consistent dividend growth.
