Fortis (TSX: FTS) is down nearly 10% from its 2026 high. Investors who missed the big rally in the stock over the past two years are wondering if Fortis is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend income and long-term capital gains.
Source: Getty Images
Fortis share price
Fortis trades near $75 per share at the time of writing compared to $83 a few months ago. The drop has pushed the dividend yield up to 3.4%.
Fortis owns and operates close to $80 billion in utility assets across Canada, the United States, and the Caribbean. The businesses include power generation facilities, natural gas and electric utilities, and electricity transmission grids that generate rate-regulated revenue that is largely predictable and reliable due to the essential nature of the products and services.
Fortis has historically grown through a combination of strategic acquisitions and development projects. The current $28.8 billion capital program is expected to raise the rate base from about $42 billion to nearly $58 billion over five years. As the new assets are completed and start to generate revenue and profits, the boost to cash flow should enable Fortis to deliver on its goal of raising the dividend by 4% to 6% annually through at least 2030. Fortis has given investors a dividend increase for 52 consecutive years, so the guidance should be solid.
Consolidation in the utilities sector is ramping up as the industry braces for a surge in demand for electricity and natural gas. In fact, two other players in the domestic market are merging. Emera (TSX: EMA) just announced an all-stock deal to buy Canadian Utilities (TSX: CU) for $14.3 billion. More deals could be on the way, and Fortis could potentially be a buyer or even become a takeover target in the next few years.
In Canada, the government wants to build a national power grid as part of its goal of becoming an energy superpower. Fortis has the expertise and the national footprint to potentially participate in that growth initiative. South of the border, the company is positioned well to benefit from rising electricity and natural gas demand as new gas-fired power generation facilities are built to provide electricity to data centres.
Risks
Rising yields on government bonds are pushing up the cost of borrowing for companies that need to raise cash to fund their growth initiatives. Part of this move is due to traders anticipating a series of rate hikes by the U.S. Federal Reserve and the Bank of Canada to keep inflation in check.
Fortis uses debt to finance part of its capital program. The jump in borrowing costs can cut into profits and will potentially reduce cash that is available for debt payments or dividend increases. The last time that rates increased dramatically, in 2022 and 2023, Fortis saw its share price pull back more than 20%. Rate hikes by the central banks might not need to be as aggressive as they were a few years ago, but the surge in borrowing costs is a headwind for the stock and more downside could be on the way.
The merger between Emera and Canadian Utilities takes out one potential competitor for new projects in the Canadian market, but it also creates a larger firm that would be more capable of taking on big investments or competing for strategic acquisitions.
The bottom line
Near-term volatility should be expected until there is more clarity on how high borrowing costs will go over the next year. That being said, investors seeking reliable dividend growth might want to start nibbling at the current level and look to add to the position on any further downside that might occur. Buying Fortis on meaningful dips has historically proven to be a profitable move for patient investors.
