Fortis (TSX:FTS) stock is on the verge of becoming a “Dividend King”: a stock that has 50 years of consecutive dividend increases under its belt. Currently, Fortis has 49 consecutive years of dividend increases to its name. It only needs one more year to become a Dividend King.
Many dividend investors prize stocks known as “Dividend Aristocrats,” which have 25 years of consecutive dividend increases. Fortis has enjoyed the status of “Dividend Aristocrat” for 24 years already. If it becomes a Dividend King, it will become even more sought after by dividend investors.
Why Dividend King status is important
Fortis becoming a Dividend King would be important in several ways.
First, it would increase awareness of the stock among dividend investors. If Fortis became a Dividend King, it would join lists of such stocks compiled by online publications. That could get a wider group of international investors buying FTS, increasing its returns.
Second, a 50-year track record of dividend growth would be a confirmation of Fortis’s financial management. Any company can have a high dividend today; it’s the ability to raise the dividend over time that matters.
History is full of examples of companies that had high but unsustainable dividend yields. If Fortis joins the Dividend King list, it will be apparent that it is not such a company.
In my opinion, it’s already pretty clear that Fortis’s dividend is dependable. The company has a 78% payout ratio, which means that it pays out 78% of its profit in the form of dividends. That’s high but not unsustainable and is consistent with Fortis’s historical payout ratios. The company certainly doesn’t need to become a Dividend King in order for its dividend safety to be known, but it couldn’t hurt.
Could anything prevent Fortis’s rise?
Having looked at the implications of Fortis becoming a Dividend King, it’s time to ask: what are the risks facing its shareholders? In my opinion, there aren’t too many, but a few are worth noting.
First, the company has $29 billion in debt. The higher interest rates go, the more expensive it gets to service this debt. There is no realistic way for Fortis to stop having large amounts of debt: utilities are just very expensive to run.
Second, Fortis has more debt than equity. The company’s shareholder equity (book value) is $19 billion, so its debt-to-equity ratio is 1.52. Again, that suggests that debt could become an issue.
Third and finally, Fortis’s dividend track record could become an issue. When companies are very well known for paying consistent dividends, their shareholders tend to get scared when the dividends are cut. If Fortis someday reduced its dividend, or just kept it steady, shareholders would probably retaliate by selling the stock. That would likely send the stock price down.
Foolish takeaway
By all accounts, Fortis will become a Dividend King next year. It will be quite an achievement. According to Sure Dividend, there are only 48 known Dividend Kings in North America. So, Fortis will be in very rare, very good company.
