Fortis (TSX:FTS) is down about 15% from the 2022 high. Contrarian investors are wondering if FTS stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) targeting dividend income and total returns.
Fortis share price
Fortis (TSX:FTS) trades near $54.50 at the time of writing compared to more than $64.50 at the high point two years ago. The stock is actually off the 12-month low of around $50, but there is still decent upside potential for patient investors.
Fortis is a utility company with roughly $68 billion in assets spread out across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electric transmission networks, and natural gas distribution utilities. These operations provide essential services. Households and companies need to keep the lights on and heat their buildings regardless of the state of the economy. That makes Fortis a good stock to own if you are concerned about a recession. Fortis also gets most of its revenue from regulated assets. This means cash flow tends to be predictable and reliable, which helps management make long-term investment decisions to drive growth.
Impact of interest rates
Utilities are capital-intensive businesses that tend to use quite a bit of debt to fund growth initiatives. The sharp increase in interest rates in Canada and the United States over the past two years made borrowing more expensive. Higher debt costs can cut into profits and reduce cash that is available to pay dividends or buy back stock. As a result, Fortis and other utility stocks fell out of favour with investors due to concerns that rates would have to keep rising to get inflation under control and stay elevated for a long time.
The Bank of Canada recently cut interest rates and the U.S. Federal Reserve is expected to follow that lead by the end of this year or in early 2025. Once rate cuts ramp up there could be a new surge of investor funds into Fortis and the utility sector.
Dividends
Fortis has raised the dividend in each of the past 50 years. That’s a great track record for investors who rely on dividend growth to provide stable and increasing passive income. A steady pace of dividend increases also tends to support a higher share price over time when dividend growth is driven by an expansion of cash flow.
Fortis is working on a $25 billion capital program that will boost the rate base from $37 billion in 2023 to more than $49 billion in 2028. As the new assets go into service, management expects the increase in cash flow to support planned annual dividend increases of at least 4% over that timeframe.
At the time of writing, Fortis stock offers a dividend yield of 4.3%.
Is Fortis a buy today?
Existing shareholders should continue to own the stock. New investors who missed the bounce off the 12-month low should feel comfortable adding the shares to their portfolios at this level. As interest rates decline, Fortis should move higher and could regain the 2022 high in the next couple of years.
If you have some cash to put to work in a portfolio targeting steady dividend growth, this stock deserves to be on your radar.
