The main content for this article first appeared in the Seeking Alpha Marketplace service DGI Across North America, in which other utilities were discussed.
Utilities have been great income-growth investments over the long term. The Canadian utilities have dipped meaningfully recently. So, I think it’s a great time to check out Fortis Inc. (TSX:FTS)(NYSE:FTS).
What has Caused the Selloff in Canadian Utilities?
At the end of 2017, the central bank kept the benchmark overnight rate at 1%, but some analysts see as much as three rate hikes in 2018, which would bring the overnight rate to at least 1.75%.
Read this article for the impacts and implications of interest rate hikes on businesses. Higher interest rates would increase the cost of running businesses that have sizeable debt levels — such as utilities.
Additionally, at the recent highs, the utility stocks were arguably fully valued. So, some investors might have sold to take profit and preserve their capital in a high market.
- Is the selloff overdone? (i.e. Are the stocks priced at a good value today?)
- Are their dividends safe?
- What are good price targets to start building a position in (or add to) these utilities?
Long-term value and dividend investors should care about the answers to these questions, and they are what we’ll discuss here.
|Ticker||Share Price||Yield||Payout Ratio||S&P Credit Rating||Debt/Cap|
- Share Price – based on Jan. 12, 2018 market close price
- Yield – based on most recent dividend declaration
Fortis has ~97% of regulated assets. So, its earnings and returns on equity are highly predictable. As a result, it tends to trade at a premium to its peers. Currently, it trades a P/E of almost 17.3.
Fortis has increased its dividend for 44 consecutive years. Its 5-year dividend growth rate is 6.3%. It aims to increase its dividend by 6% per year through 2022.
Technically, the stock is looking for a bottom. Fundamentally, it’s not a bad time to start scaling in Fortis. But if you’re looking for a bigger margin of safety, aim for the ~CAD$42 per share level.
The consensus from Thomson Reuters (TSX:TRI)(NYSE:TRI) has a 12-month target of CAD$50.50, which represents nearly 16% upside potential, or a total return of ~19.8% for the near term.
If interest rate hikes occur, it could trigger more selloffs in the utilities. Income investors should take any dips as an opportunity to buy at a lower valuation and to get a bigger yield.
Interested investors can aim to buy Fortis starting at the ~CAD$42 level.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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