When it comes to earnings and dividend growth predictability, it’s pretty tough to top shares of Fortis (TSX: FTS), especially in a market environment that’s grown a bit on the expensive side, with growing concerns about what an AI bubble burst could do to the broad markets.
Undoubtedly, the AI trade has minted investors with fairly quick gains, but, in many ways, it feels like much of the easiest (and least risky) money has already been made. With more volatility in the now well-known picks-and-shovels plays, questions linger as to whether a reversion to the mean in some of the more heated parts of the market could drag everything down.
Steve Eisman, a man made famous by betting against housing in the face of the Great Financial Crisis, recently highlighted the dependence of the AI trade on just two firms (OpenAI and Anthropic), as well as the potential for them to act as an “Achilles’ heel” for big tech. While the AI trade is still humming along as the S&P 500 marches to a new high, it’s easy to discount the potential downside risks, even as competition at the frontier heats up.
Source: Getty Images
The case for boring dividend payers as AI and high-multiple tech risks swell in the coming years
While nobody can predict the future, especially as a new technology disrupts new markets, I do think that investors who are already heavy on big tech and the AI trade might wish to concentrate on some of the risk-off names that could do well, even if the frontier AI innovators were to fizzle out at some point down the line, dragging much of tech and maybe even the market with it.
A name like Fortis might be boring and arguably too predictable. But it’s a steady hand in a market climate that might be a bit overly focused on the potential reward rather than the risk taken on. At the end of the day, you can bet on the big up-and-comers with multi-bagger potential while also having a backup plan that can carry the weight should an upset or big rotation come to be.
Arguably, building such a barbell portfolio, with weights in growth as well as defensive value, might be the wise play for investors looking to be ready for whatever this market throws at us as we move into year’s end.
Buying the dip in a boring dividend grower
Though Fortis is a fairly predictable business, its stock isn’t immune to the occasional fumble. In fact, it’s fresh off a big plunge, now down close to 9% from its all-time highs.
Knocked lower by expectations for higher capital expenditures, which won’t get any better once the Bank of Canada starts hiking rates, as well as a muted reaction to the latest quarterly number, I’d argue that the latest dip has to be enticing for investors looking to lighten up on risk.
Even after a near-correction, the stock is hardly cheap, going for 22.2 times trailing price-to-earnings (P/E). Still, the 4–6% dividend growth rate seems more or less like a “lock” for the next few years.
Is it a mind-blowing dividend growth rate?
Not quite. But given the track record of reliability and high regulatory barriers to entry, I’d take certainty and a slight discount on the shares over the hot play in AI any day of the week, especially if OpenAI and Anthropic don’t quite hit the ground running after their IPOs. Sure, you’re not going to get many positive surprises with the dividend policy, but in my view, Fortis stands out as a fair-priced, low-beta (0.41) way to prepare for more volatility. Who knows? Fortis might win big if we are in for a sustained growth-to-value rotation.
As Fortis revamps its capital plan, my guess is that there’s potential to excite as we learn more about how data centre power demand ties into the longer-term path ahead. My take? Fortis is an extremely steady ship that might just be able to grow its payout on the higher end of the mid-single-digit bar it set for itself. Perhaps long-term investors should treat the latest plunge as more of a chance to buy.
