Steady Growth and a Rising Dividend

03/04/2009 8:47 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, editor of The Canada Report, says a growing utility is a good defensive play with an attractive yield.

Fortis Inc. (TSX: FTS.TO, OTC: FRTSF) is the largest investor-owned gas and electric distribution utility in Canada, serving more than two million customers. Its regulated holdings include a natural gas utility in British Columbia and electric utilities in five Canadian provinces and three Caribbean countries. It owns nonregulated hydroelectric generation assets across Canada and in Belize and upper New York State. It also owns hotels and commercial real estate in Canada.

Fortis recently reported fourth-quarter and year-end results, beating analysts' expectations. The company earned a profit of C$76 million in the fourth quarter (figures in Canadian dollars), down slightly from C$79 million for the same quarter in 2007, but better than the Street had been looking for.

For the full year, Fortis earned C$245 million (C$1.56 per share), up from C$193 million (C$1.40 per share) in 2007. It was the ninth consecutive year of record earnings. Fortis also announced it completed its largest ever capital program last year, spending approximately C$900 million on new energy infrastructure.

For the most part, Fortis is a regulated company, which means it must seek approval from various agencies for price increases, major changes in services, etc. This puts a ceiling on the company's growth potential. However, regulated companies of this type also have reduced downside risk, so this is a stock that is well-suited to conservative investors.

There is also some concern about the company's assets in Belize, where it is waging a legal battle against a June 2008 regulatory decision by Belize Electricity which disallowed previously incurred energy supply costs. In the meantime, Fortis has booked a one-time C$13 million loss relating to the ruling.

Fortis paid out C$1.00 per share in dividends in 2008, up 22%. Recently, the company announced it is increasing its quarterly dividend by another 4%, commencing with the first quarter. This is its 36th consecutive dividend increase, the longest record of any public company in Canada. At the current price, the yield over the next 12 months is 4.49%.

Fortis is a beacon of strength in an otherwise bleak market. It offers predictable cash flow, steady profits, with an impeccable record of annual dividend increases. It's exactly the kind of stock investors should want to own during turbulent times such as these.

If possible, buy the shares on the Toronto Stock Exchange, where they are highly liquid with an average daily trading volume of about 400,000. Although the stock trades over the counter in the US, activity [there] is very limited. (It closed Tuesday in Toronto at C$23.50.)

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