Fortis enjoys a monopoly-like business model with diversified assets that generate regulated earnings in good times and bad – which provides the stock’s bullet-proof appeal.Paul Daly/The Canadian Press
The bottom has fallen out of the stock market in three short weeks, economists are convinced that a nasty recession is approaching, everything from professional basketball games to the Boston Marathon have been put on ice – so should you be looking for buying opportunities?
At the very least, you should be aware that this remarkable sell-off has ensnared several bullet-proof stocks that are ideally positioned to cruise through this unprecedented turmoil relatively unscathed.
Fortis Inc. is one of them.
Yes, there are stocks with bigger dividends. And for particularly risk-loving investors, there are probably better rebound opportunities should the world gain an upper hand in its battle against the global new coronavirus pandemic, which is crippling economic activity.
But Fortis, a Canadian power utility with transmission and distribution operations in five Canadian provinces, nine U.S. states and three Caribbean countries, seems like the right bet if volatile markets continue to leave investors feeling sick to their stomachs.
The stock fell as much as 23 per cent during the current meltdown, before rebounding 10.6 per cent on Friday, suggesting that it had been tossed into the same bargain bin as just about every other troubled stock in the universe.
That doesn’t seem quite right, though, for a company that has demonstrated its staying power by raising its dividend for 46 consecutive years (the yield is slightly below 4 per cent right now).
David Quezada, an analyst at Raymond James, made a compelling case for the stock in a brief note on Friday, based on four points that should support further gains.
First, Fortis enjoys a monopoly-like business model with diversified assets that generate regulated earnings in good times and bad – which provides the stock’s bullet-proof appeal.
During the previous financial crisis, the biggest hit to Fortis was flat year-over-year profit growth in 2009. Most investors can probably live with that as a worst-case scenario. Even better, earnings on a per-share basis increased by an average of 7 per cent between 2007 and 2009.
“Furthermore, Fortis has meaningfully diversified since then, adding three utilities in the U.S. (Central Hudson, UNS and ITC) while growing its rate base at a 13.4 per cent CAGR [compound annual growth rate] between 2009-2019,” Mr. Quezada said in his note.
Second, Mr. Quezada expects that Fortis’s $18.8-billion capital program – infrastructure spending that underpins steady growth in the utility’s rate base, profits and dividends over the next three to five years – comes with minimal risk: 80 per cent of the capital spending is directed at small, low-risk projects.
“Thus, we consider the company’s earnings outlook to be stable going forward,” Mr. Quezada said.
Third, while there are widespread concerns about high corporate debt levels and ratings downgrades as profit expectations deteriorate in a recessionary environment, Fortis again is in a good position with a healthy balance sheet.
It paid down short-term debt levels last year by selling its stake in the Waneta Expansion Hydroelectric Project in British Columbia, which raised $1-billion and won kudos from DBRS, the credit-rating agency.
“The company’s business-risk profile remains stable following the Waneta Expansion disposition, with approximately 99 per cent of operating cash flow generated from regulated utilities,” DBRS said in a May note that confirmed Fortis’s investment-grade credit rating.
More recently, Fortis issued $1.1-billion of new shares in November, taking advantage of a robust share price and high valuation to repay more debt.
As a result of these moves, a key ratio that compares funds from operation (or FFO, a measure of cash flow) to debt has improved from 10.5 per cent in 2018 to 12 per cent today, further supporting the utility’s investment-grade ratings.
Lastly, consider what the sell-off has done to Fortis’s valuation: Mr. Quezada estimates that Fortis shares trade at 17.6-times 2020 estimated per-share profit, down from a recent high of 22-times estimated earnings.
Okay, that’s not exactly a fire sale. But it looks very attractive when profit expectations in other sectors are looking like guesswork, and it compares nicely to falling bond yields as central banks slash their key interest rates in an effort to bolster the economy.
There’s no sure thing in today’s market. But Fortis comes close.