Dividend aristocrat is a solid ‘buy’

Fortis Inc. operates as an electricity and natural gas distribution utility for residential, commercial, and industrial markets in Canada, the United States, and the Caribbean. Equity analyst Cory O’Krainetz of Vancouver-headquartered Odlum Brown sees this Canadian blue chip stock’s LNG expansion and pipeline construction as compelling projects.

Positive net earnings as well as acquisitions in the U.S. energy market make Fortis Inc. (TSX─FTS) a solid ‘buy’, says Odlum Brown analyst Cory O’Krainetz after levying a $44 price target for the Canadian blue chip utility giant.

The established price target, in the analyst’s view, equates to roughly 18 times 2017 estimated earnings of $2.40 per share, which is in line with the 10-year average forward P/E (price-to-earnings) multiple.

However, interest rates are exceptionally low, which should justify an above-average valuation multiple. In addition, the company’s peer group trades at an average 2017 estimated P/E multiple of closer to 20 times and the business characteristics are less compelling in some cases.

In his firm’s view, the dividend yield, combined with potential earnings growth of over seven per cent annually, equates to an attractive total return relative to other yield-oriented stocks or bonds. Mr. O’Krainetz writes:

Among top Canadian blue chip dividend stocks

We consider Fortis to be one of Canada’s highest-quality blue chip dividend stocks. Over 90 per cent of earnings are derived from regulated utilities that generate stable cash flows over long periods of time.

Growth also tends to be lower risk as investments in pipelines, transmission lines, and power generation produce a fixed rate of return and predictable cash flows.

The company has identified roughly $9 billion in projects that will likely be completed over the next five years. We believe those investments will lead to strong earnings growth and annual dividend increases.

In recent years, acquisitions took centre stage. Fortis bought regulated utilities in New York (CH Energy) for US$1.5 billion in early-2013 and in Arizona (UNS Energy) for US$4.3 billion in mid-2014.

Fortis should benefit over the long term from these assets given that the acquisitions were made with the Canadian dollar near par, the earnings profile is very predictable, and they offer attractive platforms for future growth.

The integration of those businesses has also gone smoothly and created more diversity within the portfolio. Fortis has increased its capital investments to an annual run rate of almost $2 billion, up from just over $1 billion previously.

Most of the spending will be allocated to regulated businesses that offer predictable returns.

There are numerous projects under development, but we view the expansion of its LNG facility at Tilbury and potential construction of a pipeline to the proposed Woodfibre LNG facility as particularly compelling projects.

Dividend aristocrat holds Canadian record

Fortis continues to be a great option for income investors given its attractive dividend yield and the likelihood of dividend increases.

The company has raised its dividend for 42 consecutive years, the record for a public corporation in Canada. As far as risk goes, the current regulatory environment has a heavy influence on earnings, and by extension, share prices.

Political desire to keep energy costs down is of particular concern in some areas and could lead to lower returns for regulated utilities in order to placate consumers.

Valuation multiples are driven in large part by interest rates. If bond yields were to move higher, there would likely be downward pressure on the stock price.

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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