Summary
- Fortis Inc. has been a Canadian utility to own, and continue to own long term.
- A dividend yield that is supported is a strong play in this late business cycle.
- Recent equity issuance has put some pressure on the stock, but now that it is well capitalized, it can move higher.
- Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »
Do you know the only thing that gives me pleasure? It's to see my dividends coming in. - John D. Rockefeller
Fortis Inc. (NYSE:FTS) is a Canadian-based utility, but do not think that Canada is its only play. Not only does it have regulated utilities across Canada, from British Columbia to Newfoundland and Labrador, but several investments in the U.S. in Arizona and New York, and multiple other states. Fortis also has some exposure in emerging markets, such as the Cayman Islands, Turks and Caicos, and Belize. Against a backdrop of market uncertainty, this stock has been attractive, and I believe it will continue to be throughout 2020, especially compared against other utility plays. Almost 100% of earnings are expected to come from the regulated and long-term contracted utility infrastructure, according to RBC, something that will support its steady dividend yield. Fortis is a solid investment at a fair valuation relative to the competition, and one that should reduce your portfolio volatility while providing upside. Even if a recession is on the horizon, people tend to heat their homes in the winter.
Source: Fortis
As mentioned in the Lead-Lag report last week, one thing I wanted to highlight was the dividend yield of FTS. The dividend has always been a constant for the company and is currently paying a yield of 3.3%. That is one of the main things I like about this company. Given the steady stream of cash flow that comes in, the company can continue the dividend for the long term. Just look at the history of dividends from Fortis' website above.
The dividend has been increasing at a significant rate since the Great Recession, and it continues to have a manageable payout ratio. Fortis is the go-to defensive regulated utility in Canada, and they have international plays to help the upside of the company. Also, since 2017, the company has stated an aversion for large scale M&A, which was reiterated at the 2019 investor day. That is important for a company such as this, as large-scale purchases require large scale investment - which likely means more stock dilution. Given the recent equity issuance and lack of big potential purchases, I think it is an excellent time to get in after some recent depression of the share price.
Speaking of equity issuance, recently, in November, the company did issue $1.1 billion of common equity consisting of a $0.5 billion private placement to a U.S. institutional investor and a $0.6 billion public issuance (there was a full exercise of the over-allotment that took the total to about $1.2 billion). This was dilutive to current shareholders, but the decision helps shore up the company financially and removes the overhang of share issuance happening more often.
Go big or go home! With the issuance, the company also terminated its at-the-market (ATM) equity plan and amended its dividend reinvestment plan to remove the discount given (2%). Previously, Fortis said the ATM plan would satisfy about $0.6 billion in the next five years, so seeing this removed at least gives us some clarity on share issuance. One thing they are doing with this new capital is driving toward cleaner energy. That is a management team that is aware of current trends, clearly moving in the right direction long term. They are shifting toward more renewable energy, improvements in efficiency, increased storage capacity, and further clean energy investments - potentially more ambitious targets in Arizona. This is a well-diversified strategy that warrants your attention.
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