Fortis (TSX:FTS) is up 15% in the past year. Investors who missed the rally are wondering if Fortis stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Fortis stock
Fortis trades near $62 per share at the time of writing. That’s just shy of the 12-month high of around $64. The stock picked up a nice tailwind in the second half of last year as the Bank of Canada and the U.S. Federal Reserve started to cut interest rates.
Fortis uses debt to fund part of its growth program. Projects often cost billions of dollars and can take years to complete. The sharp jump in borrowing costs in 2022 and 2023 put pressure on utilities as the higher rates drove up debt expenses. This cuts into profits and can reduce cash that is available for distributions.
Risks
Lower rates have attracted investors back to the utility sector. Additional rate cuts in the United States might not materialize in 2025 as previously expected due to sticky inflation and the uncertain impact of tariffs being placed on goods entering the country. High tariffs can get passed on to consumers, resulting in jumps in prices. A spike in inflation in the U.S. could even force the Federal Reserve to raise interest rates. If market sentiment shifts from expectation of additional rate cuts to anticipation of a rate hike, Fortis and other utility stocks might face new headwinds.
Opportunity
Fortis has businesses located in Canada, the United States, and the Caribbean. The operations include power generation facilities, natural gas distribution utilities, and electricity transmission networks. Nearly all of the revenue comes from rate-regulates assets, so the cash flow should be predictable and reliable. Demand for natural gas and electricity is expected to rise in the coming years.
Fortis grows by building new assets and through acquisitions. The company hasn’t made a large purchase for several years, but that could change if borrowing costs continue to trend lower. In the meantime, Fortis is working on a $26 billion capital program that is expected to 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 jump in cash flow should support planned annual dividend increases of 4% to 6% through 2029. This is good guidance at a time when Canada and the U.S. are facing some uncertain economic times.
Fortis increased the dividend in each of the past 51 years. Investors who buy the stock at the current level can get a dividend yield of about 4%. That’s lower than some other stocks, but the dividend growth steadily increases the return on the initial investment.
Should you buy now?
Near-term volatility should be expected. If inflation moves higher in Canada and the United States in the coming months, the stock could give back some gains. That being said, income investors with a buy-and-hold strategy should be comfortable owning Fortis at this level. Dips would be viewed as an opportunity to add to the position.
