Utility companies provide essential services, such as meeting customers’ electricity, natural gas, and water needs. So, these companies are less susceptible to market volatility, thus providing stable and reliable returns. Meanwhile, the Canadian equity markets have been on an upward momentum over the last few weeks, hitting a new all-time high on Thursday. Easing trade tensions and hopes for interest rate cuts by the United States Federal Reserve amid weak economic numbers have improved investors’ sentiments, driving the equity markets. Despite the optimism, the concerns over global economic growth amid protectionist policies still persist.
In this uncertain outlook, investors can strengthen their portfolios with quality utility stocks that are less prone to market volatility. Against this backdrop, I believe Fortis (TSX:FTS) is an excellent buy.
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Fortis’s historical performance
Fortis operates 10 regulated utility assets, serving 3.5 million customers across Canada, the United States, and the Caribbean. With 99% regulated assets and 93% engaged in the low-risk transmission and distribution business, economic cycles and commodity price fluctuations will not substantially hurt the company’s financials. Besides, the company’s expanding rate base, improving safety records, and rising operational efficiency have supported its financial and stock price growth. The company’s injury frequency rate and electricity outages are below those of its peers. Its innovative practices, preventative maintenance, and implementation of efficiency programs have lowered its operating cost growth.
Supported by this healthy financial performance, Fortis has delivered an average total shareholder return of 10.6% over the last 20 years. Besides, the natural gas and electric utility company has raised its dividends for 51 years and currently offers a forward dividend yield of 3.7%. Also, the company has made capital expenditures of $1.4 billion in the first quarter and is on track to invest around $5.2 billion this year. Amid rate base expansion, increased customer rates, and favourable currency translation, the company has posted an EPS (earnings per share) of $1.00, representing a 7.5% increase from the previous year. Now, let’s look at its growth prospects.
Fortis’s growth prospects
Meanwhile, global energy demand could continue to rise amid population growth, industrialization, rapid urbanization, and rising living standards, increasing demand for Fortis’s services. In response, the company is expanding its asset base with a $26 billion capital investment plan. This five-year investment plan could grow its rate base at a 6.5% CAGR (compound annual growth rate) to $53 billion by 2029.
The management expects to fund 70% of these investments through the funds generated from its operations and dividend reinvestment plan. Therefore, these investments should not substantially raise the company’s leverage. Further, the company’s improving operating efficiency and workers’ safety could continue to drive its margins in the coming years. Amid these growth initiatives, Fortis’s management expects to raise its dividends by 4–6% annually through 2029. So, its growth prospects look healthy.
Investors’ takeaway
Fortis has delivered 10.3% returns year-to-date, outperforming the broader equity markets. Its solid quarterly performances and falling interest rates have led to strong buying in the stock. Since June, the Bank of Canada has slashed its benchmark interest rates seven times to 2.8%. Moreover, economists are predicting two more 25-basis-point rate cuts this year. Given its capital-intensive business, Fortis could benefit from falling interest rates. Besides, the company’s valuation looks reasonable, with its NTM (next 12 months) price-to-earnings multiple standing at 19.2, making it an enticing buy.
