Fortis (TSX:FTS) recently gave back some of its 2024 gains. Investors who missed the rally this year are wondering if Fortis stock is now undervalued again and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Fortis stock price
Fortis trades near $60 per share at the time of writing. The stock was as low as $51 in April this year and recently ran as high as $63.75, nearly recovering the drop from the $65 it reached in 2022 before interest rate hikes in Canada and the United States put pressure on utility stocks.
Fortis operates utility businesses in Canada, the United States, and the Caribbean. These include power-generation facilities, electricity transmission networks, and natural gas distribution utilities. Investors like these rate-regulated assets for their reliable and predictable cash flow to cover dividend payments and provide funding for capital projects.
Growth
Fortis grows through a combination of strategic acquisitions and organic developments. The company hasn’t made a large purchase for several years but is working on a $26 billion capital program that is expected to raise the rate base from $38.8 billion in 2024 to $53 billion in 2029. Fortis has other projects under consideration that could be added to the development plan. In addition, a decline in interest rates could spark a new wave of consolidation in the utility sector.
Dividends
As new assets are completed and go into service, the rise in revenue and cash flow should support steady dividend growth over the next five years. Fortis intends to boost the distribution by 4-6% through 2029. Investors should feel comfortable with the guidance. Fortis increased the dividend in each of the past 51 years.
At the time of writing, Fortis provides a dividend yield of 4.1%.
Risks
The slide in the share price in 2022 and 2023 occurred in step with rising interest rates in Canada and the United States. Fortis uses debt to fund part of its growth program. A jump in borrowing costs puts pressure on profits and cuts into cash that can be used for dividends or debt reduction.
The central banks stopped raising interest rates late last year and began to cut rates in the second half of 2024. This is why Fortis investors saw the share price rebound in recent months.
Looking ahead, the outlook for interest rates is different in Canada and the United States. The Bank of Canada will likely continue cutting interest rates to support the economy. Unemployment is creeping up, and inflation remains near the central bank’s 2% target.
In the United States, however, the story is more complicated. The American economy remains in good shape, and unemployment is very low. At the same time, inflation has increased in the past two months. The Federal Reserve just cut interest rates by another 0.25%, but additional cuts in 2024 might not occur if inflation continues to rise. Donald Trump’s plan to implement new tariffs on all goods entering the United States could create a surge in prices.
In the event that the Federal Reserve puts rate cuts on hold or is forced to raise rates again, utility stocks could come under new pressure.
Is Fortis a buy now?
Income investors should be comfortable owning Fortis at this level. That being said, there could be a better entry point in the coming months, so it might make sense to take a half position and look to add on any additional weakness.
