Is Fortis Stock a Slam Dunk Buy on Rate Declines?

ByDylan Callaghan Published On:

Fortis stock has been a steady performer in the Canadian utilities sector for pretty much its entire existence. It makes up a core chunk of my portfolio.

Many investors are wondering if this company is a buy in todays falling rate environment. After all, utilities tend to increase in popularity as rates fall, as debt becomes cheaper and dividend stocks become more attractive relative to fixed income options.

I’m intrigued by the current valuation of Fortis stock. I do expect valuations to expand as rates continue to fall, and it might finally be this company’s time in the sun.

Let’s dive into the details and see if this could be a smart move for Canadian investors looking for stability and growth.

Key Takeaways

  • Fortis has unveiled a massive $26 billion capital plan for the next five years
  • The company has increased its dividend for 51 consecutive years
  • Current stock valuation might present an opportunity for investors

Lofty capital plans should work out well for Fortis

Fortis’s ambitious new five-year capital plan is one of the best in the business. The company is investing a whopping $26 billion from 2025 to 2029.

What’s really impressive is how this plan will boost Fortis’s rate base. They’re projecting an increase from $38.8 billion in 2024 to $53 billion by 2029. That’s a solid 6.5% annual growth rate.

A utilities rate base effectively determines how much it can charge consumers. The more this grows, the more the utility can charge, and the more profits it can make.

The bulk of this investment is going into transmission projects. Modernizing the company’s grid is going to be pretty key moving forward, while many countries focus on energy efficiency in light of climate change.

In my opinion, Fortis’s capital plan positions the stock to be one of the best performing utilities in the country moving forward.

Fortis extends its dividend growth streak to 51 years

The company has raised its quarterly dividend by 4.2% to $0.615 per share. This marks an astounding 51 consecutive years of dividend increases.

As an income-focused investor, I love the consistency. Fortis has proven itself to be a reliable dividend payer through pretty much any economic cycle.

Fortis is a Dividend King, which are companies that have increased their dividends for 50+ years straight.

In Canada, only Canadian Utilities has a longer streak. However, the performance of these two stocks isn’t even close. Fortis has been the clear winner, highlighting that dividend growth doesn’t necessarily mean strong returns.

The company has extended its 4-6% annual dividend growth target through 2029. Although this isn’t as high as the targets it set pre-pandemic, the environment is certainly different, and these targets are well within what I would deem appropriate for a utility company.

The combination of a strong track record, current yield, and future growth potential makes it an attractive option for dividend portfolios.

Declining rates should be bullish for Fortis

Fortis stock is likely poised for a rally as interest rates start to dip. As you can tell by the chart below, when rates start to fall, Fortis’s stock tends to start to go on a run.

Falling rates are typically a tailwind for utility stocks like Fortis. As yields on fixed-income investments drop, dividend-paying utilities become more attractive to income-seeking investors.

Lower rates also ease the pressure on Fortis’s debt levels.

As a capital-intensive business, Fortis carries significant debt to fund its operations and growth projects.

When rates fall, Fortis can:

  • Refinance existing debt at lower costs
  • Take on new debt more cheaply to fund expansion
  • Improve its interest coverage ratio

I expect these factors to boost Fortis’s bottom line and make the stock more attractive to investors.

These two tailwinds kind of work together, which could set Fortis up to outperform moving forward. As a utility company, it has struggled over the last few years because of high rates. This means not a lot of retail investors are looking at it right now. This gives you an edge.

Valuations are attractive at this point in time

The company’s forward P/E of 18.18 is fairly reasonable for a stable utility, especially given its growth prospects. It is a near double digit discount to what Fortis historically trades at.

As interest rates start to dip, Fortis should see its borrowing costs shrink. This could give a nice boost to their bottom line, which will ultimately fuel share price appreciation as well, even if the price to earnings ratio stays below averages.

This is not a company that is going to blow your socks off with double digit growth. But at this point in time, there are multiple tailwinds that could fuel outperformance moving forward that don’t rely on the company having to grow earnings all that much.

Would I be buying right now?

Fortis stock is a solid buy at the moment in my opinion. Its current 3.8% dividend yield is quite appealing, especially considering fixed income rates are falling relatively fast.

As a conservative investor, I’d say Fortis is one of those rare stocks you can feel comfortable buying almost anytime. It’s a bit like a bond proxy, but with growth potential.

Here’s why I’m bullish on Fortis:

  • Consistent dividend growth
  • Stable, regulated business model
  • Falling rates should boost the bottom line and bring in new capital from fixed income investment shifts

Fortis’s $26 billion five-year capital plan will allow it to grow its rate base, which ultimately leads to being able to charge consumers more, which then leads to both dividend and earnings growth.

In my view, Fortis is a cornerstone for any dividend-focused portfolio. It’s the kind of stock I’d be happy to hold for the long haul, regardless of short-term price fluctuations.