Friday, October 17, 2008

Fortis Inc. purchase

Yesterday I initiated a position in Fortis Inc. (FTS) at $21.31, where it was trading near its 52 week low of $20.70.

About Fortis
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.

Why Now
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.


Nurse B, 911 said...

You sure are addicted to dividends

Congrats on the good buy and it should make you feel even better to see it moving upwards of 10% today. I've been cheap and waiting for a lower price to double my position, so it looks like I might have to bite the bullet soon. Hopefully my insights were helpful and the investment pays off for both of us over the long-term.

MG (moneygardener) said...

Brad, I think the P/E ratio of 14-15x is misleading because i think Terasan's earnings are seasonal.

Using P/B shows how cheap FTS really gets around $21. Book value is about 17/share where it would yield 5.9%. I could see this thing trading down to $18 as an absolute rock bottom minimum where it would be a steal at a yield of 5.6%. This would only occur if things went to hell in a handbasket. Oh, wait a minute they alread have...

Anonymous said...

Don't think you will go wrong on this one. I still prefer CU-T as it is a touch more better valued and bit more of pure play (no hotels etc.), but the differences are minor....FTS is a cornerstone stock in a dividend growth portfolio.

MG (moneygardener) said...

Just glanced at CU and FTS is much cheaper from a price/book standpoint. I also like the fact that FTS has grown their dividend much quicker than CU.

Mr. Cheap said...

I like Fortis too, but according to the average dividend yield on it is 5.6%, making it a little too expensive for me right now.

I'm hoping to get a better price on it at some point in the future...

Anonymous said...

Fortis Inc. will be added to the S&P/TSX 60, replacing Fording Canadian Coal Trust (takeover by Teck will close on October 30).