Taking the name Fortis in 1987, the company pushed into the Caribbean in 2006 and made three multi-billion-dollar acquisitions between 2012 and 2016 to expand its U.S. presence.
Today, Fortis is a geographically diverse regulated utility that serves 3.3 million utility customers across nine U.S. states, five Canadian provinces, and three Caribbean countries.
Fortis relies on the U.S. for about 56% of revenue, followed by Canada (41%), and the Caribbean (4%). The company generates 78% of sales from electric utilities, 21% from natural-gas utilities, and 1% from a natural-gas storage facility in British Columbia.
The utility’s capital investments focus on transitioning to cleaner energy sources. Fortis plans to invest $19.6 billion in capital expenditures over five years to increase its rate base to $40.3 billion by 2025, implying annual compound growth of 6%.
Management expects to fund that investment primarily from operating cash flow and debt issuance, with a smaller portion coming from contributions to the company’s dividend reinvestment plan (DRIP).
The rate base represents a utility’s net asset base used to provide regulated electric, natural-gas, and water services. Regulators use this crucial metric to calculate a utility’s rate of return on regulated services, so a higher rate base hints at a utility’s potential for growing profits.
For the 12 months ended March, Fortis grew earnings per share 7% and sales 4%. For 2021, Fortis is expected to increase both per-share profits and revenue 7%.
Fortis yields 3.7%, above the average of 3.3% for S&P 1500 utilities. The stock’s lofty payout ratio — 76% of earnings devoted to the dividend versus its sector average of 61% — bears monitoring.
But Fortis has raised its dividend in each of the past 47 years. And management aims to increase the dividend 6% annually through 2025, matching its growth rate over the past five years.
The shares have returned 16% including dividends over the past three months. At 22 times trailing earnings, the stock trades above the median S&P 1500 Index utility stock, a premium warranted by its growth potential.
Fortis stands out among peers in Quadrix®, with both sector-specific scores exceeding 75. The stock also looks timely, earning above-average ranks for Momentum, Value, Earnings Estimates, and Performance — the same can be said of just two of the 50 utilities in the S&P 1500 Index.
Admittedly, we rarely recommend utilities on our buy lists. But Fortis offers solid operating momentum, reliable dividend growth, and a decent valuation.