Yesterday I initiated a position in Fortis Inc. (FTS) at $21.31, where it was trading near its 52 week low of $20.70.
Fortis Inc. (FTS) is the largest investor-owned distribution utility in Canada, serving almost 2,000,000 gas and electricity customers. Its regulated holdings include a natural gas utility in British Columbia and electric utilities in 5 Canadian provinces and 3 Caribbean countries. It owns non-regulated hydroelectric generation assets across Canada and in Belize and upper New York State. It also owns hotels & commercial real estate in Canada.
Why Would I Buy Fortis
Fortis fits into my portfolio in my utilities/telecom. section, being most similar to Inter Pipeline Fund (IPL.UN) in the nature of its business. Being mainly an electric and natural gas utility owner/operator, Fortis draws extremely stable revenues from it's customers. Much of Fortis' business is also regulated, which adds further stability to their revenue. Fortis has a stellar history of earnings and dividend growth dating back to 1972. Fortis is a Canadian company which pays eligible dividends, currently to the tune of 4.7% yield.
Similar to Diageo (DEO), I feel that Fortis has been unfairly sold off during this period of turmoil in the markets. Companies that are resistant to changes in economic activity and consumer spending should be able to maintain solid earnings through these troubled times. Electricity, like alcohol, is an essential good no matter what the economy brings.
By my estimation Canadian dividend paying utility companies including Fortis and TransCanada (TRP) have been expensive stocks for a few years now. These businesses have always attracted me, but I have never been able to rationalize a purchase of these companies due to their high valuation. The recent drastic market sell off has brought these stocks back down to earth. The market panic selling and need for cash is affecting all stocks, Fortis being no exception.
Valuation By Price to Book Ratio
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
Fortis Current Price/Book Ratio = 1.25x
Fortis' annual average Price/Book Ratio has been less than this level one time in the previous 10 years (1999 only).
Being a utility, Fortis has a significant amount of debt (Deb/Equity ratio of 1.82). Fortis also has a dividend pay out ratio as a percent of earnings of 64% showing that there is little room to raise dividends if earnings become flat for an extended period.
I have confidence that given the stability of Fortis' revenue and earnings, as well as their emphasis on growth they should continue to provide stable returns to investors for years to come despite economic conditions.