Fortis (TSX:FTS) is up nearly 18% in the past year. Investors who missed the rally are wondering if FTS stock is still 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 $65.50 at the time of writing. The stock has been on an upward trend for most of the past 12 months, spurred by cuts to interest rates in Canada and the United States.
The rebound occurred after the stock had fallen from near $65 in the spring of 2022 to as low as $50 in October that year as the central banks ramped up rate hikes to cool off a hot economy and get inflation under control.
Utility companies use a lot of debt to fund large capital projects that can cost billions of dollars and take years to complete. As such, they are sensitive to changes in interest rates. Higher rates drive up borrowing expenses, which puts pressure on profits and can reduce cash available for distribution to shareholders. Elevated debt costs can also force companies to shelve some projects.
The U.S. Federal Reserve and the Bank of Canada cut rates over the past year, but are currently on hold as they wait to see how tariffs will impact the economy and inflation. If inflation jumps in the coming months, the central banks will have a tough time justifying additional rate cuts. In fact, rate hikes might be needed. In that scenario, Fortis could face new headwinds.
That being said, analysts widely expect economic weakness to push the central banks to cut rates again before the end of the year, even if inflation drifts higher. Falling rates would be positive for Fortis and other utility stocks.
Growth
Fortis is working on a $26 billion capital program that will raise the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service, Fortis expects earnings to rise enough to support annual dividend increases of 4% to 6% over the five years. Fortis raised the dividend 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 3.8%.
Management has other projects under consideration that could get added to the development plan. Fortis also has a strong track record of making strategic acquisitions. Falling interest rates could spur a wave of consolidation in the utility sector.
The bottom line
Near-term volatility should be expected until there is more clarity on a trade agreement between Canada and the United States, as well as between the U.S. and its other major trading partners.
Fortis is down, however, from the recent high around $69, so investors now have a chance to buy the stock on a nice dip. Acquiring FTS stock on pullbacks has historically proven to be a savvy move for patient investors focused on passive income and long-term capital gains.
