Fortis Inc.: A Quality Utility That Looks Cheap?!

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).

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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
FTS CAD$43.55 3.9% 67% A- 51%
  • 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.

Dividend Growth

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

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.

Summary

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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Disclosure: At the time of writing, I didn’t own any stocks discussed.

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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