If there is any word to describe Fortis (TSX: FTS), it is stable. This stock is like ballast for a portfolio. The market whips up and down. Yet Fortis does its thing: It grows its rate base, increases earnings, and raises its dividend.
In fact, this formula has created compounded annual total returns of 18% in the past three years, 10.5% over the past 10 years, and 10.1% over the past 20 years. That beats the S&P/TSX Composite Index, which has only delivered an 8.7% compounded annual return over the past 20 years.
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Fortis is an income and capital compounder
With a Beta of only 0.41, Fortis’ market-beating returns come at significantly less volatility than the broader market. This is a key reason why Fortis acts as ballast in your Tax-Free Savings Account (TFSA) portfolio.
Fortis has also compounded its dividend. It has a track record of consecutively increasing its dividend for 52 years! For context, 20 years ago, Fortis’ quarterly dividend was $0.16 per share. Today, it is $0.64 per share. That is an increase of 300%!
Regulated, low-risk assets
Fortis has been able to do this by accumulating a mix of high-quality, regulated utility assets. It operates nine utilities across North America. Its diversity gives it exposure to different climates, regions, regulators, and economies. These are essential assets society relies on to live and work.
100% of its assets are regulated, which means that it largely has a monopoly in the regions it operates. Fortis provides safe, reliable service. In return; the regulator allows it to earn a fair rate of return on the investment it makes.
Right now, Fortis has a five-year plan to spend $28.8 billion in capital expenditures (around $5.8 million per year). These are relatively low-risk, executable investments focused on expanding its transmission and distribution asset base.
A foreseeable growth pipeline ahead
Through this, it expects its rate base to increase by $16 billion or by a 7% compounded annual growth rate (CAGR). Beyond 2030, it still has a substantive opportunity pipeline, so mid-single growth is likely for at least a decade ahead.
Fortis maintains a healthy balance sheet to support its growth plans. While it has over $35 billion of net debt, it has an A- credit rating that keeps its cost of capital low. Likewise, its debt is well covered by an earnings before interest and tax (EBIT)-to-interest expense ratio of 2.25 times. Its debt portfolio is well-laddered, so it is not subject to any major maturity at any one time.
The takeaway on Fortis for your TFSA
Fortis is not the fastest-growing stock you will hold in a TFSA. However, you hold it in your TFSA for its low-volatility, low-risk returns. This stock tends to outperform in market downdrafts simply because of its solid, steady-as-it-goes business.
Fortis only yields 3.2% today. However, it is targeting 4–6% compounded annualized dividend growth for the coming five years. Fortis has a dividend payout ratio of 72%. This expresses that the dividend is well-covered. Fortis still generates internal cash flow after its dividends.
Fortis is a boring stock with a strong dividend and capital growth track record. If you want to sleep easy at night, Fortis is just the stock for a long-term-minded TFSA portfolio.
