Fortis Inc (TSX:FTS) is one of Canada’s biggest and most successful utility companies. The company recently announced its 52nd consecutive dividend hike, cementing one of the longest dividend growth streaks among Canadian companies. The company also delivered considerable growth in its revenue and earnings in the last 12 months (LTM) and made progress on an ambitious capital expenditure (CAPEX) plan.
While investors normally think of high CAPEX spend as a negative, in Fortis’ case the spending will create immediate revenue-generating opportunities. The company is spending money to improve its infrastructure and even connect new customers in remote areas. The expenditures are expected to take Fortis’ rate base from $41.9 billion to $57.9 billion over a five year period – a compounded annual growth rate (CAGR) of 7%.
A utility’s rate base (value of the assets it uses to generate revenue) is a big factor in regulators’ willingness to approve rate hikes. So, there is an immediate opportunity here for Fortis to make money off of its CAPEX.
In this article, I’ll explore three reasons to buy Fortis like there’s no tomorrow after its 52nd dividend hike.
Source: Getty Images
Reason #1: Dividend growth and sustainability
By far the biggest draw Fortis has – at least for some investors – is its dividend potential. The stock has a 3.5% yield at today’s price, which is above average for a TSX stock. The stock’s payout ratio is 71%, which is very much within the sustainable range. Finally, the company’s ongoing CAPEX program should ultimately generate new revenue and profit opportunities, driving more dividend growth in the future.
Reason #2: Long-term growth
Another reason to buy Fortis stock like there’s no tomorrow is that the company has an above-average long-term growth track record for a utility. In the LTM, the company grew its revenue, earnings and operating cash flow (OCF) at 5.2%, 5.1% and 7.5%, respectively. Over the last five years, the company compounded its revenue and earnings at 6% and 5%, respectively. Obviously, these are not explosive rates of growth, but they are sufficient for a stock that is not richly valued. In the next section, I will show that Fortis is very much situated within the “not richly valued” category, at least by the standards of the wider markets these days.
Reason #3: Valuation
A third reason to buy Fortis stock like there’s no tomorrow is the fact that the company has a modest valuation. Based on Monday’s stock price and the last 12 months’ financials, Fortis trades at:
- 21 times earnings.
- 3 times sales.
- 1.6 times book value.
By contrast, the S&P 500 currently trades at about 30 times earnings and 5.5 times book value. So, Fortis is cheaper than much of the market today, and does not require much growth to be worth the investment.
Foolish bottom line
When we look at everything Fortis has going for it, a picture of a stock that’s worth buying hand over first begins to emerge. Fortis is cheap-ish, it’s growing, and it has a very sustainable dividend with a moderately high yield. As a dividend play, Fortis really stands out.
