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Overview

Fortis Inc. (OTCPK:FRTSF) is the largest investor-owned Canadian-based electric and gas utility.

Despite being based in Canada, Fortis also has utility-related assets in the USA (e.g. New York) and in the Caribbeans (e.g. Belize).

Fortis trades on the Toronto Stock Exchange (TSX) under the ticker "FTS", and also trades on the Over-The-Counter Bulletin Board (OTCBB) under the ticker "FRTSF". Throughout this article I will refer to Fortis as FTS.

FTS is part of the S&P/TSX60 index.

FTS is a Canadian corporation and therefore pays its quarterly dividends in Canadian dollars. All the following figures are thus in Canadian dollars.

Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

FTS pays a quarterly dividend.

The dividends are generally declared in December, March, May, and September, and are generally paid in March, June, September, and December.

FTS generally increases its quarterly dividend once a year, in December.

The last increase in December 2103 was of 3.2% (from CA$0.31 per quarter to CA$0.32 per quarter).

Dividend History

With the most recent increase, FTS has increased its quarterly dividend for 41 consecutive years, making FTS a dividend champion (more than 24 years of consecutive dividend increases).

FTS is also the Canadian company with the longest streak of consecutive dividend increases.

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

The recent evolution of FTS dividend is really in two periods.

Between 2004 and 2008, FTS increased its dividend at a relatively fast pace for a utility. During those years, the dividend growth rate was between 10% and 22%.

Then, starting in 2009, the dividend growth rate fell sharply, remaining around 5% since.

Since FTS operates in a mostly regulated environment, I don't expect FTS to growth its dividend at double-digit rates for extended periods of time. In my view, single-digit dividend growth rate is what should generally be expected from a utility.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?

  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

I have not analyzed the evolution of free cash flow, as it is not very relevant in the case of FTS.

Over the last 10 years the earnings have been generally growing, which is good. Notably, even during the last recession, there was no significant drop in earnings. This shows that utilities are generally recession-proof. In the end, you still have to cook and heat your house even if the economy is bad.

Still, over the last 10 years, we can see that the dividend has been growing faster than the earnings. This is clearly visible from the rising payout ratio. Speaking of which, at 70%, the current payout ratio is a bit high but sustainable for a utility. As we have seen, the earnings of a utility are pretty safe.

Nevertheless, FTS will likely keep future dividend increases on the low side to maintain and possibly decrease the payout ratio.

In any event, despite its relatively high payout, FTS dividend is safe.

Overall, I think the current dividend is safe. The earning payout ratio is high but sustainable for a utility.

Is the current dividend likely to grow?

FTS has the longest streak of consecutive dividend increases for a Canadian company. That along speaks for itself.

Over the past decades, FTS has shown again and again its willingness to increase its dividend; I don't see why FTS dividend would stop growing in the future. In that sense, FTS has been active of the acquisition front. These recent acquisitions will likely contribute to FTS earnings and dividend growth.

However, as we have seen, the current payout ratio is a bit high. This will likely force FTS to grow its dividend at a slower pace, at least in the next few years.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For FTS, I've used the following inputs:

  • Share price: $31.50Dividend rate: $1.28

  • Dividend growth rate:

    • Optimistic scenario: 9.0%
    • Realistic scenario: 7.2%
    • Pessimistic scenario: 5.4%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for FTS varies from $30.60 (pessimistic) to $43.76 (optimistic), with a realistic value of $36.48.

With a current share price around $31.50, FTS appears fairly valued and almost undervalued.

I've also calculated that the DGR would need to be 5.70% over the next 20 years to justify the current price of $31.50.

Notably, a DGR of 5.70% is below the 10-year earnings growth rate. Hence, such a rate is likely sustainable in the foreseeable future.

At $31.50, I think FTS is fairly valued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculated how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For FTS, I've used the following inputs:

  • Initial investment: $1000

  • Current yield: 4.06%

  • Dividend growth rate:

    • Optimistic scenario: 9.0%
    • Realistic scenario: 7.2%
    • Pessimistic scenario: 5.4%

Notably, the DGRs are the same as the DGRs used for this valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

Looking at the graph, we can readily see that if FTS maintains an average dividend growth rate of about 5.4%, an investment in FTS will return less money over 30 years than a similar investment in the benchmark stock.

However, if FTS can maintain an average dividend growth rate somewhere between the pessimistic DGR (i.e. 5.4%) and the realistic DGR (i.e. 7.2%), an investment in FTS would be as good as an investment in the benchmark stock.

So, in my view, FTS is more or less equivalent to the benchmark stock, at least with respect to the cash return. The only differences are its slightly higher yield and lower growth.

At the current price and yield, I think FTS would make a good dividend investment.

Conclusion

At 41 years, FTS has the longest streak of consecutive dividend increases in Canada. That's not bad for a utility.

Still, FTS remains a utility and the fact that it operates in a mostly regulated environment will generally prevent FTS from being a high dividend growth stock.

However, what FTS lacks in growth it has in yield and, more importantly, in steadiness.

At the current price and yield FTS appears to be fairly valued.

So, if you prefer a slow but steadily growing dividend stock, FTS would be a good fit.

If you prefer higher growth at the expense of a lower yield, you should probably look elsewhere.

Final recommendation: I think FTS is a buy (but there are better stocks).

Full Disclosure

I don't currently own shares of FTS.

I don't intend to initiate a position in FTS within the next 72 hours.

Source: Fortis Inc. - Dividend Fact Sheet