2-for1 Sale
Fortis (TSX:FTS) is up 8% so far in 2025. Investors who missed the bounce are wondering if FTS stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend income and total returns.
Fortis stock price
Fortis trades near $64.50 at the time of writing. This is close to the 12-month high and is back at the level the stock reached in 2022 before interest rate hikes in Canada and the United States sent the share price into a pullback. At one point, Fortis dipped below $50 before staging the recovery.
Rate cuts by the Bank of Canada and the U.S. Federal Reserve in the second half of 2024 spurred a rebound in utility stocks. The sensitivity to borrowing costs in the sector is due to the large capital investments utilities need to make to expand their assets. Fortis uses debt to fund part of its capital program. Projects cost billions of dollars and can take years to complete. As interest rates moved higher in 2022 and 2023, the company faced rising debt expenses. Higher interest charges cut into cash that can be paid out to shareholders. Rising rates can also make some projects unprofitable.
Reductions in borrowing costs have eased investor concerns over the past six months, which is why the stock has rallied. The Bank of Canada just cut interest rates again, but higher inflation could force the central bank to slow its rate-cut program. South of the border, the U.S. Federal Reserve is also expected to sit tight on further cuts until it sees how tariffs are going to impact the economy and inflation.
Growth
Fortis is working on a $26 billion capital program that will raise the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets go into service, the growth in revenue and cash flow should support planned annual dividend increases of 4-6% over the next five years. Fortis has bumped up the dividend annually for more than five decades.
Investors who buy FTS stock at the current price can get a dividend yield of 3.8%. Higher yields are available in the TSX, but the dividend growth steadily increases the yield on the initial investment.
Risks
Tariff wars risk driving up inflation, which could force the central banks to start raising interest rates again. In that scenario, the market would likely put new downward pressure on utility stocks. Given the current uncertainty on how extensive tariffs will be and how long they might remain in place, investors should brace for some near-term turbulence.
The bottom line on Fortis stock
A pullback wouldn’t be a surprise in the coming months, especially if inflation spikes in Canada and the United States. As such, I wouldn’t back up the truck right now. That being said, Fortis remains a solid buy-and-hold pick for dividend investors. Any downside should be viewed as an opportunity to start a position or add to existing holdings.
