When people ask me to name my favourite dividend stocks, one company consistently makes the list: Fortis Inc. (FTS-T).
I’ve owned the utility operator personally for more than two decades. It’s also one of the largest holdings in my model Yield Hog Dividend Growth Portfolio.
With Fortis having recently announced its updated five-year capital spending plan, let’s explore what makes the St. John’s-based company a core holding for dividend investors, in my opinion.
A consistently rising dividend …
A stock that pays a juicy dividend is nice. A stock with a juicy dividend that grows every year is even better, and Fortis is a leader in that department. On Sept. 26, the company raised its dividend by 4.2 per cent to $2.46 a share on an annualized basis, marking 51 consecutive years of rising payouts. Including the latest increase, the shares now yield about 4.1 per cent.
And I’m willing to bet there’s much more where that came from. Reflecting confidence in its future, Fortis also extended its dividend growth guidance of 4 to 6 per cent annually by a year, to 2029. Dividend hikes aren’t official until the board approves them, but with more than half a century of increases under its belt, Fortis isn’t a company I would bet against.
… supported by growing earnings
Dividends can’t grow in a vacuum. For increases to be sustainable, they need to be supported by growing earnings, out of which dividends are paid. In its updated capital plan, Fortis announced that it intends to invest $26-billion in its utilities from 2025 through 2029. These investments are expected to drive average annual growth of 6.5 per cent in the company’s rate base, which is the value of assets on which a utility can earn a regulated return. The growing rate base, in turn, should lead to higher earnings.
Fortis’s “five-year capex program … and dividend increase of 4 per cent highlight that infrastructure growth remains robust across its diversified regulated utility footprint,” said Ben Pham, an analyst with BMO Capital Markets, in a note to clients. “Focus on organic growth is creating a lot of value for shareholders.”
A diversified asset base
Of the total five-year investment, about $7.6-billion is being directed to Fortis-owned ITC Holdings Corp. to, among other things, expand and upgrade its electricity transmission infrastructure, which spans eight states in the U.S. Midwest. Another $7.6-billion is being allocated between UNS Energy, which has more than 700,000 gas and electric customers in Arizona, and Central Hudson Gas & Electric, with more than 400,000 customers in New York state.
The balance of $10.8-billion will be invested primarily in Fortis’s utility operations in British Columbia, Alberta, Newfoundland, Ontario and the Caribbean.
Decarbonization is also major driver of growth for Fortis. Roughly one-quarter of the five-year capital plan will support green initiatives such as the reduction of coal-fired generation and the building of transmission lines to bring more renewable power online.
Largely regulated earnings
Here’s another thing I like about Fortis: About 99 per cent of its assets are regulated by public utility commissions. This contributes to stability and predictability of its earnings and also supports the company’s long-term dividend growth. Fortis’s steady cash flows also bolster its solidly investment-grade credit ratings, which allow it to borrow money at relatively attractive interest rates.
“We believe Fortis remains one of the ‘go-to’ stocks for Canadian investors … seeking a defensive utility,” said Maurice Choy, an analyst with RBC Dominion Securities, in a note.
Lower interest rates a major tailwind
When I wrote about Fortis a year ago, I noted that the share price had been hurt by rising interest rates, which increase borrowing costs for utilities and boost the appeal of fixed-income securities. However, I wasn’t about to give up on the stock – and I even added to my model portfolio position at the time. “One day, hopefully not too long in the future, interest rates will start to decline and the headwind from rising rates will turn into a tailwind,” I wrote.
That day has come. Now that interest rates are falling, Fortis’s share price has been on a roll. For the year through Sept. 30, the stock posted a total return of about 24 per cent, including reinvested dividends. While I don’t expect a repeat of such outsized gains over the next 12 months, I’m confident that Fortis will continue to deliver annual dividend increases for many years to come and that its share price will move higher over the long run. That makes it an ideal stock for income-focused investors.
Remember to do your own due diligence before investing in any security and be sure to maintain a diversified portfolio that suits your risk tolerance.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.