A dividend king is a stock that not only pays, but raises its dividend for 50 consecutive years. There aren’t many of them out there. According to Sure Dividend, there are exactly 54 dividend Kings in the world today, and Canada is home to some of them. In this article, I will explore the one Canadian “dividend King” stock that could rally in 2024 if interest rates come down.
Fortis
Fortis Inc (TSX:FTS) is Canada’s very own dividend King. It acquired its “Kingly” status earlier this year, when it raised its dividend for the 50th consecutive year.
The only criteria a stock needs to meet to become a dividend King is 50 years of dividend increases. A stock does not need to be in the S&P 500 or meet a market cap minimum to be a King. As a result, there are many dividend kings that are not dividend aristocrats. That might seem surprising, since investors are used to thinking of Kings as the higher ranking aristocrats. In this case, that’s not an accurate description of the situation. Fortis is a dividend King, but not a dividend Aristocrat, for the simple reason that it is not part of the S&P 500.
Why FTS has a good setup for 2024
One reason why Fortis has a good setup for 2024 is the fact that interest rates are expected to fall this year. High interest rates are bad for utilities, as such companies tend to have high amounts of debt. Debt is one thing that Fortis definitely has in spades. In its most recent quarter, it has $27 billion in debt, which produced $1.3 billion in annual interest expenses. Also, the company has $20 billion in common equity, giving it a 1.4 debt/equity ratio – lower than one is normally considered bad news, so Fortis’s 1.4 indicates high solvency. All-in-all, Fortis has very mixed signals from the various factors affecting its business.
The good news is that interest rates are expected to fall next year. The last inflation readings from both the U.S. and Canada showed inflation just barely above 3%, meaning that the Fed’s goal (2%) is within striking distance. If the Fed starts cutting rates, then Fortis will likely benefit from it, because it’s a highly indebted utility that tends to do better when rates – its borrowing costs – are low.
Risks to watch out for
I have so far outlined some pretty compelling facts about FTS stock. Now it’s time to look at one big negative:
The possibility of interest rates rising once again in 2024. There are several active conflicts in the world right now, including major ones in Israel/Gaza and the Ukraine. Conflicts have been known to affect the price of oil from time to time, usually taking it higher. In this case, we have an active conflict in the world’s #1 oil producing region (the Middle East). So, we could easily see the price of oil rise again. If that were to happen, then other commodities would likely follow suit, leading to an inflation spike. That could cause central banks to go back to hiking rates, instead of lowering them. Fortis would not do well in that scenario.
