Fortis Inc.’s share price has been battered by rising interest rates over the past five months, yet the St. John’s-based utility is offering investors a compelling argument to consider the stock: low-risk growth built on the expansion of cleaner energy.
This reason is certainly worth a closer look.
Last Friday, Fortis FTS-T updated its five-year capital plan with the release of its third-quarter financial results. The utility – whose electricity transmission and distribution operations span Canada, the United States and parts of the Caribbean – will make investments worth a total of $23.5-billion over the next five years through 2027.
That’s up $2.3-billion from the previous five-year plan through 2026.
“A good chunk of that is driven by our cleaner energy investments,” David Hutchens, chief executive officer of Fortis, said in an interview.
Fortis will spend $5.9-billion on such investments over five years, through building wind and solar interconnections in several U.S. states, developing renewable energy and storage in Arizona in place of existing coal generation, and upgrading the natural gas system in British Columbia.
“There is a very strong alignment among our stakeholders to progress as quickly as we can towards a cleaner energy future,” Mr. Hutchens said.
Traditional energy, such as oil and gas, has gained a lot of attention this year amid concerns about energy security and reliability, particularly in Europe.
But the U.S. Inflation Reduction Act, which includes US$370-billion to fight climate change through incentives and tax credits, is spurring growth in renewable energy in the United States. It is also accelerating the trend toward more electricity demand by encouraging things like electric vehicles.
Mr. Hutchens credits the act for bolstering Fortis’s long-term energy transition plans, which include being coal-free by 2032 and eliminating 75 per cent of greenhouse gas emissions by 2035 – even as some countries in Europe are now delaying planned shutdowns of aging power plants as fossil-fuel energy prices soar.
“You can get caught up in a short-term blip in energy prices, but longer-term we expect them to revert back to normal and for us to continue along with our plans,” Mr. Hutchens said.
He added: “I would not expect us to push back any of those retirements, because we do have economic ways of replacing that power.”
The best part for investors: The utility’s updated capital plans will translate into growth in its rate base – or the allowed rate of return on its assets – of 6.2 per cent a year over the next five years, according to the utility’s projections. That will underpin revenue growth and dividend increases.
David Quezada, an analyst at Raymond James, said in a note that the rate base projections, up from 6 per cent a year previously, are at “a level we consider to be highly attractive given Fortis’ diversified footprint and scale.”
The updated plan arrives at a time when the stock is trading at a relatively low valuation of 17.8 times the analyst’s estimated 2023 earnings. That’s near the low end of a price-to-earnings ratio that tends to hover between 16 and 23, according to Mr. Quezada.
The reason for the recent valuation dip: Rising interest rates have sent government bond yields surging to multiyear highs in recent months as central banks battle surging inflation.
The 10-year U.S. Treasury bond yields more than 4 per cent, for example, offering meaningful competition to stocks backed by slow-growing profits and dividends. Fortis stock currently yields 4.2 per cent.
“While we acknowledge the cycle of rising rates may not yet be complete, we stress that looking back over an extended period, this stock has only seen a valuation level below this a handful of times,” Mr. Quezada said.
The bullish case for utilities rests on central banks hitting the brakes on rate increases, perhaps by the start of 2023. And if the global economy falters from tighter monetary policy, as many economists expect, steady utilities can offer investors considerable safety from a broader downturn in corporate profits.
Fortis has laid out its growth plans for the next five years, offering an attractive opportunity in an economy that is looking increasingly murky.
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