Fortis Inc. makes it to the big leagues

Acquisitions over the past five years have grown the utility company’s rate base by 156 per cent. It shares its growing earnings by raising its dividends.

Fortis Inc.

Low interest rates favour interest-sensitive stocks such as utilities. As bond yields lose their appeal, utility stock dividend yields look more appetizing, and companies like Fortis should command heftier P/E multiples than last year.

St. John’s, Newfoundland-headquartered Fortis Inc. (TSX—FTS) has become one of the top 15 utilities in North America. These past five years, the company has acquired and successfully integrated three US-based utility franchises—Central Hudson Gas and Electric in New York state, UNS Energy in Arizona and ITC Holdings based in Michigan. In the process, it has increased its rate base 156 per cent to $26.1 billion from $10.2 billion.

A utility’s rate base is the value of assets on which it is allowed to earn a set rate of return, as determined by regulatory authorities. This rate of return is calculated as a percentage of the rate base. So the larger a utility’s rate base, the more it will be able to earn on a set rate.

A leader in its industry

With its increasing rate base, Fortis has become a leader in the North American regulated electric and gas utility industry, with total assets of $53 billion. The company serves utility customers in five Canadian provinces, nine US states and three Caribbean countries.

The company’s 2018 financial results were slightly below expectations. For the year ended Dec. 31, 2018, Fortis made $1.1 billion (adjusted), or $2.51 a share, compared with $1.0 billion, or $2.47 a share, in 2017. The 2018 consensus estimate had called for the company to earn $2.53 a share.

Capital investment at the regulated utilities, a strong performance at the Aitken Creek natural gas facility in British Columbia and a lower effective income tax rate drove the year-over-year earnings increase. US tax reform tempered growth by about two per cent.

Dividend aristocrat extends guidance thru 2023

Despite the modest adjusted earnings per share growth of 1.6 per cent, Fortis increased its dividend 5.9 per cent in December. What’s more, based on forecasted earnings growth at its utilities, the company has extended its annual dividend growth guidance of about six per cent through 2023.

Its guidance is based on good performance at its utilities, reasonable regulatory outcomes, the successful execution of its five-year capital investment plan and growth in its franchise territories.

Ambitious five-year capital investment plan

Fortis’ capital investment plan is one of its most ambitious ever. Now that it has integrated its US franchises and is operating as one North American company, management wants to spend $17.3 billion from 2019 to 2023. This plan, which was introduced in October 2018, represents an increase of $2.3 billion, or 20 per cent, from the previous year’s plan.

Its purpose is to modernize Fortis’ electricity grid, strengthen its natural gas infrastructure and deliver cleaner energy. Once completed, the company figures its utility rate base will have grown from $26.1 billion today to $35.5 billion in 2023.

Adjusted earnings should rise to $2.63 a share in 2018. The stock trades at a reasonable 18.9 times that estimate. Its annual dividend of $1.80 a share yields 3.6 per cent. Fortis is a buy for growth and income.

 

This is an edited version of an article that was originally published for subscribers in the April 19, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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