Why Fortis Inc. Is the Most Reliable Dividend Stock in Canada

Fortis Inc. (TSX:FTS) expects to grow at least 6.5% through to 2019. This should lead to a stronger dividend growing at a higher rate.

| More on:

Utilities are among the safest companies to invest in because they provide a service that fills a need and not a want. The best of the best is Fortis Inc. (TSX:FTS). It is a leader in electric and gas utilities in North America. It is also the top holding in the iShares S&P/TSX Capped Utilities Index Fund, making up about 24% of the fund.

Fortis is a low-risk regulated utility business that maintains a strong balance sheet with an investable grade S&P credit rating of A-.

Shareholder returns and dividend

Fortis outperformed the market in the last decade. It returned an average of 12% per year, while in the same period the S&P 500 Utilities (Sector) returned 9.6%, and the S&P/TSX Capped Utilities Index returned 8.4%.

Fortis paid the longest streak of growing dividends in Canada with 42 consecutive years of annual dividend increases. Recent dividend-growth rates have been in the 3-4% range. So, Fortis qualifies for an inflation-beating investment to maintain your purchasing power.

Fortis offers a solid 3.4% yield, paying out about 71% of its earnings. This payout ratio is sustainable.

Fortis’ assets

At the end of 2014 Fortis’ total assets were worth $26.6 billion, with 93% regulated. Under its regulated business, Fortis has 1.9 million electric customers and 1.2 million gas customers. Its non-regulated assets were worth $1.9 billion, including hydroelectric generation, and oddly enough, some hotels and commercial real estate.

Currently, Fortis owns and operates 23 hotels and 2.8 million square feet of commercial real estate. They are successful businesses which generated about $250 million of revenue in 2014. Fortis is considering selling all or a portion of these assets, selling shares of Fortis Properties, or an initial public offering. If so, the target is to complete this process in Q2 2015.

Fortis timed its acquisitions of Central Hudson and UNS Energy well. Fortis acquired them at a time when the Canadian dollar was at a historical high against the U.S. dollar, paying a total of US$6B between 2013 and 2014.

What to expect from Fortis

It would have been the best time to buy Fortis shares in the 2013 and 2014 period when its price-to-earnings ratio (P/E) was around 18 and 19 when it made the U.S. acquisitions.

Historically, Fortis commands a premium P/E of 20. With its current P/E at 21, it may seem Fortis shares are expensive on the surface, but the company foresees significant organic growth of about 6.5% through to 2019, compared with the historical earnings growth of 3-4%.

Fortis is also pursuing two new projects in British Columbia, the expansion of the Tilbury LNG facility, and the Woodfibre gas pipeline expansion. If these projects come into fruition, the organic growth could increase from 6.5% to 7.5%.

For the long-term investor, Fortis is a solid utility that offers a 3.4% reliable yield. That yield should grow in the 3-6% range if Fortis decides to reduce the payout ratio to retain more earnings for future growth, or if it maintains its current payout ratio level.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned.

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Best Stock to Buy Right Now: Enbridge vs TC Energy?

Enbridge and TC Energy rebounded nicely over the past year. Are more gains on the way?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

2 Utility Stocks That Are Smart Buys for Canadians in November

Are you looking for some of the smart buys to consider in November? These utility stocks offer growth and a…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for its 5% Dividend Yield?

Is Power Corporation of Canada (TSX:POW) stock's 5% dividend yield worth it? Discover why this resilient stock could be a…

Read more »

hand stacks coins
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These three dividend stocks are ideal for strengthening your portfolio and earning a stable passive income.

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »