Utilities stocks have lagged the market this past year. To maintain a balanced portfolio, put new money into electric utilities for safety and attractive, growing dividends.
Since December, 2020, the 10 electric utilities that we regularly review on The Back Page have risen by 11.3 per cent. That’s a solid return. Since the market bottom in March 2020, however, many stocks have soared by even more. Particularly cyclical stocks such as lumber, base metals and energy producers.
Due to ‘portfolio drift’, you’ll likely find that the percentage of your stock money in utilities has fallen. You can rebalance your portfolio by putting new money into the electric utilities. If you’re instead gradually withdrawing from the market, sell stocks in the economic sectors that have gone up the most, not utilities.
Many investors feel optimism that the developed world will soon defeat the COVID-19 pandemic. The ‘third wave’ of the pandemic, however, has hit Canada hard, especially Ontario. New varieties of COVID-19 are much more contagious and make patients significantly sicker. If new varieties spread in the US, the optimists could feel disappointment. While the US has a more reliable supply of vaccines, many refuse to take them. The country may fail to reach ‘herd immunity’ which would protect all Americans.
When will we defeat COVID-19?
In addition, developing countries such as Brazil may remain COVID-19 hot spots. Until almost all developing countries immunize their populations, it’s hard to see how COVID-19 will stop mutating and disappear. Ongoing bad news about the pandemic could see optimism give way to pessimism. This, in turn, could hinder a global economic recovery and the stock market upswing.
On the positive side, it’s often pointed out that the stock market climbs a wall of worry.
What’s more, many countries have spent heavily to nurse their populations back to health and to rebuild their economies. A good example is the US. Then, too, many people can now work at home. As a result, many workers have saved much more money than usual. When the economy reopens, meeting ‘pent-up demand’ should boost the economy. The Globe & Mail reports that “commercial bank economists now expect Canada’s GDP to grow by around 6 per cent in 2021”. (GDP, or Gross Domestic Product, is the value of goods and services produced in Canada).
More important, interest rates remain low. Government of Canada 10-year bonds, for instance, yield only 1.55 per cent. Of the 10 electric utilities stocks on The Back Page, eight yield more. Calgary-based Canadian Utilities, for instance, yields 5.13 per cent. Even better, the yields of most electric utilities grow each year. And, outside of tax-deferred accounts, dividends are taxed more lightly than interest.
Our standard advice is that you gradually invest in stocks. We think that this is a fine time to buy electric utilities. Let’s say that you’re nervous about the stock market and economy. Electric utilities should hold up better than most in a setback for four reasons. First, all 10 come with our top quality rating of ‘Very Conservative’. This gives them the wherewithal to survive even deep setbacks. Second, they sell a necessity that people need in good times and bad. Third, since utilities have gone up less than most economic sectors, they have less room to fall. Fourth, rebalancing your portfolio will keep it well diversified and safer.
Let’s say that, like us, you’re optimistic about the stock market and the economy. Electric utilities should do better than many for three reasons. First, they typically pay attractive dividends. Second, some, such as St. John’s, Newfoundland-based Fortis Inc., raise your dividends each year (see below). Third, this growing stream of dividends draws income-seeking investors who bid up the prices of your shares.
Keep on buying utility stock Fortis Inc.
We’ve always held a high opinion of St. John’s, Newfoundland-based Fortis Inc. (TSX—FTS). The company remains a buy for further share price gains as well as attractive and growing dividends.
Fortis “maintains its positive long-term outlook”. It has a number of things going for it.
One is the company’s diversified portfolio of utilities across Canada as well as within the United States and the Caribbean. This increases its safety. For instance, when a hurricane damaged Fortis’ network in the Cayman Islands, it drew upon resources from other utilities to quickly repair the damage.
Fortis is diversified by regulator
As another example, regulators in Belize reportedly tried to bully Fortis into accepting low returns. But Belize is a small part of its overall operations. Fortis can reinvest in jurisdictions that are more lucrative.
A second thing that Fortis has going for it, is plenty of room to expand. Its five-year plan is to raise its rate base from $30.5 billion last year to $36.4 billion by 2023 and $40.3 billion by 2025. This will raise the company’s earnings, of course. Its three- and five-year compound annual growth rates of earnings per share were about 6.3 and 6.0 per cent, respectively.
A third thing that Fortis has going for it, is its ability to continue to raise its dividend, as it has done for decades. We call Fortis the king of the Canadian dividend aristocrats.
Fortis is “targeting average annual dividend growth of approximately 6 per cent through 2025”. This suggests that the dividend could grow from $2.02 a share today to about $2.70 a share in 2025.
The growing dividends, in turn, should convince income-seeking investors to value Fortis’ shares more highly. The dividend of $2.02 a share yields an attractive 3.7 per cent.
In 2021, Fortis, earnings are expected to grow by 8.6 per cent, to $2.79 a share. Based on this estimate, the stock trades at a P/E (price-to-earnings) ratio of 19.7 times.
Fortis’ earnings continue to grow
In 2022, the company’s earnings are expected to go up by 5.7 per cent, to $2.95 a share. Based on this estimate, the stock trades at a better forward P/E ratio of 18.7 times. The dividend currently yields an attractive 3.7 per cent. As Fortis’ earnings per share continue to grow in the years ahead, its valuation will improve.
This is an edited version of an article that was originally published for subscribers in the April 30, 2021, 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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