On July 30, the Bank of Canada held its benchmark interest rate at 2.75% for the third straight time. However, economists are predicting two more rate cuts this year, which could lower the overnight interest rate to 2.25% by year-end. In this low-interest-rate environment, investors can look to acquire quality dividend stocks to earn a stable passive income. Therefore, let’s examine whether Fortis (TSX:FTS), which operates 10 electric and natural gas utility assets across the United States, Canada, and the Caribbean, would be an ideal buy for its dividends.
Fortis’s track record of dividend payments
Fortis operates a highly regulated utility business, with 99% of its assets falling under regulatory oversight and 93% involved in low-risk transmission and distribution business. Therefore, its financials and cash flows are less prone to economic cycles and broader market conditions. Further, the company’s expanding rate base, improving operating efficiency, and favorable customer rate revisions have boosted its financial growth, thereby allowing it to increase its dividend consistently. The utility company has increased its dividends uninterruptedly for 51 years and currently pays an annualized payout of $2.46/share, translating into a forward dividend yield of 3.5%.
Fortis’s impressive second-quarter performance
Fortis posted an impressive second-quarter performance on August 1, with its net earnings coming in at $384 million, representing a 16% increase from the previous year’s quarter. Meanwhile, its EPS (earnings per share) of $0.76 represents a 13.4% increase from $0.67 in last year’s quarter. The rate base growth and favorable currency translation boosted its earnings. However, the unfavourable impact of the timing of its operating expenses, the expiration of regulatory incentives, and the lower allowed rate of ROE(return on common equity) at its Alberta facility offset some of its growth.
Fortis’s growth prospects
Electricity demand is rising amid population growth, rising income levels, the electrification of specific sectors, and the expansion of data centres to support increased usage of artificial intelligence (AI). The rising energy demand could benefit Fortis, which has made capital investments of $2.9 billion this year and is on track to complete its targeted capital investments of $5.2 billion.
Further, the company’s subsidiary, Tucson Electric Power (TEP), has agreed to meet the energy requirements of a data centre located in its service territory, which could become operational in 2027, with expansion planned through 2029. According to the agreement, TEP needs to supply 300 megawatts of power initially and could rise to 600 megawatts after expansion. Further, the data centre operator has indicated a further requirement of 500–700 megawatts for its second site.
Fortis has planned to make a capital investment of $26 billion over the next five years to meet the growing energy demand. These investments could grow its rate base at an annualized rate of 6.5% to $53 billion by the end of 2029. These growth initiatives could continue to support its financial growth in the coming years, thereby allowing it to maintain its dividend growth. Meanwhile, the company’s management expects to raise its dividend 4–6% annually through 2029.
Bottom line
Supported by its solid quarterly performances and falling interest rates, Fortis has delivered an18.8% return this year, outperforming the broader equity markets. Despite the healthy returns, the company trades at a reasonable NTM (next 12 months) price-to-sales multiple of 2.7. Considering its reliable cash flows, healthy growth prospects, and consistent dividend growth, I believe Fortis would be ideal for income-seeking investors despite its moderate yield.
