Similar to the consumer staple dividend stock analysis series (including CLX, CL, KMB, PG, JNJ) produced in October, I’m starting a new one on Canadian utilities dividend stocks. Canadian utilities can be quite interesting for both Canadian and US investors as they offer great diversification within their power sources. They show great strengths in both oil (pipelines) and electric power plants. Here’s the list of Canadian companies that will be covered before Xmas:
Emera Inc – EMA
Encana Corp – ECA
Fortis – FTS
Fortis (FTS) Business Description:
Fortis is a utility distribution company operating mainly in Canada. They are serving over 2,000,000 gas and electricity customers. FTS is the main electricity supplier in Newfoundland and Prince Edward Island. They recently started the process of buying CH Energy Group (NYSE CHG) which delivers electricity to 300,000 customers in New York State. CHG also distributes natural gas to 75,000 customers. The purchase should be financed by $601M of new common shares and $900M in debt. Besides their relatively small presence in the USA, Fortis also operates power plants in the Cayman Islands. Their recent revenue drop is actually due to the loss of their power business in Belize, which was seized by that government in 2011. Most of their $13.6B assets are divided among electricity and gas plants:
FTS Stock Graph
FTS Dividend Growth Graph
It’s important to mention that Fortis has been increasing its dividend for the past 40 years on a consecutive basis which means the company has made the podium for a Canadian dividend growth stock. Over the past 6 years, the payout ratio has been quite stable between 58% and 68%:
The Company Ratios and Financial Info:
Ticker FTS
Name Fortis Inc/Canada
Dividend Metrics
Current Dividend Yield 3.64
5 year Dividend Growth 7.91
1 year Dividend Growth 3.45
Company Metrics
Sales Growth (1 year) 2.46
Sales Growth (5 year) 2.13
EPS growth (5 year) 8.39
P/E ratio 19.76
P/E Next Year 18.24
Margins growth #VALUE!
Payout ratio 68.24
Return on Equity 8.12
Debt to Capital Ratio 0.94
The evolution of the EPS compared to dividend growth is still pretty much in line:
You can see here the determination that management has to align the dividend payouts according to the success of the company.
What worries me a bit is the 5 year sales growth that is anemic (2.13%). While FTS has worked on its business to make it more profitable, the slow sales growth could reduce their potential of increasing their dividend by nearly 8% annually. You can also see that the dividend was only increased by 3.45% last year.
Probably due to its impressive dividend growth performance, FTS is trading relatively high compared to the overall TSX. Its current P/E ratio is at 19.76.
FTS Stock Technical Analysis
FTS is currently trading on a strong uptrend. It might be a good time to acquire this stock. Click here to get a free stock analysis report on FTS.
Fortis Upcoming opportunities and dangers:
Fortis has clearly established its core business a while ago and has stuck to the electricity and natural gas businesses. This is definitely a great sign of stability for current investors as its main market, Canada, shows a strong economy and should continue to expand in the future. FTS strategy relies on its internal growth within their existing operations and external growth through expansion of its core business. I like the fact that FTS is not taking too much risk in their operating business. So far, the growth has been coming from their operations in Western Canada but could eventually slowdown with the overall economic situation.
The evolution of power resources (notably natural gas) is probably the main danger for a company like Fortis. Since half of its assets are held in natural gas, any regulation (think of Belize!) or price movement on the market can greatly affect its core business. Future massive investments to develop energy sources (shale gas) can also be required in the future. Fortis will eventually have to move towards greener energy sources and invest massively if they want to keep up with ever changing regulations.
Final Thoughts on Fortis
Fortis is definitely a synonym of stability among utilities in Canada. Its main markets are relatively safe for now and should benefit from a natural growth. If the purchase of CHG is approved by regulators and completed, FTS should be able to seek growth from this acquisition.
In my opinion, FTS is trading at a relatively high price but it’s the premium to pay for a strong dividend growth stock.
Disclaimer: I do not hold shares of FTS in my portfolio.
I think that Fortis is a great utility, but unfortunately the stock is trading at a the very top of its range, borderline overvalued at a P/E of 20. I guess if stocks selloff in a few weeks/months, one could probably be able to purchase some FTS at a discount and a better entry yield.
I’m a big fan of Fortis, buy and hold and forget for decades.
We own a small bit of FTS and have been trying to decide whether to sell as it seems to be getting a bit too highly priced. This was an interesting review to read especially since it’s from an “disinterested bystander’s” point of view. Thanks for your insights.