Dividend Kings In Focus: Fortis

Printed by Bob Ciura on November 14th, 2023

The Dividend Kings are an illustrious group of firms. These firms stand aside from the overwhelming majority of the market as they’ve raised dividends for at the least 50 consecutive years.

We consider that traders ought to view the Dividend Kings as essentially the most high-quality dividend progress shares to purchase for the long run.

With this in thoughts, we created a full listing of all of the Dividend Kings. You’ll be able to obtain the complete listing, together with necessary monetary metrics reminiscent of dividend yields and price-to-earnings ratios, by clicking the hyperlink beneath:

This group is so unique that there are simply 53 firms that qualify as a Dividend King. Fortis Inc. (FTS) lately elevated its dividend for the fiftieth consecutive 12 months, becoming a member of the listing of Dividend Kings.

This text will focus on the corporate’s enterprise overview, progress prospects, aggressive benefits, and anticipated returns.

Enterprise Overview

Fortis is Canada’s largest investor-owned utility enterprise with operations in Canada, america, and the Caribbean. It’s cross-listed in Toronto and New York. Fortis trades with a present after-tax yield of three.7% (about 4.3% earlier than the 15% withholding tax utilized by the Canadian authorities). Except in any other case famous, US$ is used on this analysis report.

On the finish of 2022, Fortis had 99% regulated property: 82% regulated electrical and 17% regulated gasoline. As properly, 64% had been within the U.S., 33% in Canada, and three% within the Caribbean.

Supply: Investor Presentation

Fortis reported Q3 2023 outcomes on 10/27/23. For the quarter, it reported adjusted web earnings of CAD$411 million, up 20.5% versus Q3 2022, whereas adjusted earnings-per-share (EPS) rose 18.3% to CAD$0.84. The corporate famous that the rise mirrored “the brand new value of capital parameters authorized for the FortisBC utilities in September 2023 retroactive to January 1 2023.”

It additionally benefited from increased retail income in Arizona attributable to hotter climate and new buyer charges at Tucson Electrical Energy, efficient September 1, 2023, in addition to charge base progress throughout its utilities. “The next U.S.-to-Canadian greenback overseas change charge and better earnings at Aitken Creek, reflecting market situations, additionally favorably impacted earnings.” Notably, Fortis raised its quarterly dividend by 4.4% to CAD$0.59 per share in September.

The year-to-date (YTD) outcomes present a much bigger image. On this interval, the adjusted web earnings climbed 17.3% to CAD$1,152 million, whereas adjusted EPS rose 15% to CAD$2.37. The corporate’s YTD capital investments had been CAD$3.0 billion, and it’s on monitor to make C$4.3 billion of capital investments this 12 months. We elevate our 2023 EPS estimate to $2.22.

Development Prospects

Utility firms are usually categorised as gradual, however regular growers. Certainly, we anticipate Fortis to develop its earnings-per-share by 5.5% yearly over the following 5 years. This progress will probably be pushed by a number of elements.

After releasing its five-year capital plan of CAD$25 billion for 2024 to 2028, which suggests a mid-year charge base progress at a compound annual progress charge of ~6.3% from C$36.8 billion in 2023 to C$49.4 billion in 2027, the corporate additionally maintained its dividend progress steering of 4-6% by means of 2028.

Supply: Investor Presentation

The capital plan contains investing in areas, reminiscent of a greener and improved grid and a shift from fossil gas to photo voltaic and wind technology. Importantly, this progress charge is earlier than the affect of acquisitions, which have traditionally beenimportant for Fortis.

Aggressive Benefits & Recession Efficiency

Utility firms typically profit from a number of benefits. The primary is that they normally function in a near-monopoly on the areas that they service.

As a result of demand for Fortis’s utility companies doesn’t change a lot in varied financial environments, Fortis’s outcomes have been fairly resilient by means of financial uncertainties, together with the one we’re experiencing through which inflation and rates of interest are increased than latest historical past.

As well as, Fortis is exclusive due to its cross-border publicity. Its well timed U.S. acquisitions of regulated utilities since 2013 have allowed Fortis to now generate greater than half of its income from that nation.

Given these built-in benefits, many utilities typically outperform different sectors of the market throughout recessions. Beneath are the corporate’s earnings-per-share outcomes throughout, and after, the Nice Recession:

2007 earnings-per-share: $1.32
2008 earnings-per-share: $1.52 (15% enhance)
2009 earnings-per-share: $1.51 (~1% lower)
2010 earnings-per-share: $1.81 (20% enhance)

The corporate grew its diluted earnings-per-share in 2008, adopted by only a minor decline in 2009, which was the worst of the recession. Fortis then rapidly rebounded with 20% earnings progress in 2010.

Valuation & Anticipated Whole Returns

We anticipate Fortis to generate earnings-per-share of US$2.22 for 2023. On the present share worth, FTS inventory trades for a price-to-earnings ratio of 18.5.

Given the corporate’s steady enterprise mannequin, we consider truthful worth is nineteen instances earnings, which is near the typical valuation of the inventory for the final 5 years. Reverting to our goal valuation by 2028 would lead to a a number of enlargement, boosting annual returns by 0.5%. As well as, we anticipate annual EPS progress of 5.5% which may even contribute to shareholder returns.

Lastly, dividends will enhance returns as FTS inventory at present yields 4.1%.

Supply: Investor Presentation

FTS has now elevated its dividend for 50 consecutive years. Fortis’ payout ratio has historically been about 70% of earnings. The dividend is necessary to administration, and we consider it’s protected and will proceed to rise for years to come back.

Due to this fact, FTS is anticipated to return 10.1% yearly by means of 2028. An anticipated return above 10% qualifies FTS inventory as a purchase.

Closing Ideas

There’s a lot to love about Fortis, reminiscent of its recession-proof enterprise mannequin, the excessive success of charge enhance approvals, and the lengthy historical past of dividend progress. Solely essentially the most well-run companies will pay dividends for so long as Fortis has.

Shares of Fortis seem fairly valued. The corporate ought to proceed to develop earnings, and consequently its dividends, for a few years. With an anticipated return above 10%, the inventory is a purchase.

The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend progress traders: