Fortis Inc. $24 – Toronto symbol FTS

FORTIS INC. $24 (Toronto symbol FTS; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) supplies electrical power to around 915,000 customers in five Canadian provinces. It also owns or invests in electrical utilities in New York State, Belize and the Cayman Islands. Its real estate division owns hotels and other commercial properties, mainly in Atlantic Canada.

The company has increased its dividend in each of the past 32 years. The current rate of $0.64 a share yields 2.7%. That’s lower than TransAlta, TransCanada and Emera, but we feel that Fortis’s focus on expanding its operations outside of Atlantic Canada should enhance its earnings growth, and let it continue its policy of annual dividend increases.

In the second quarter of 2006, Fortis earned $37.9 million, down slightly from $38.2 million a year earlier; per-share earnings remained unchanged at $0.37.

Excluding unusual items, income in the most recent quarter would have grown by $7.8 million, or 20.4%. Revenue fell 5.0%, to $343.8 million from $361.9 million, mainly due to an accounting change at its Newfoundland Power subsidiary.

Regulated utilities provide over 80% of Fortis’s revenue, and 75% of its profit. While that hinders its growth, it provides Fortis with predictable cash flows that it can use for new projects.

For example, it recently spent roughly $30 million U.S. on a new hydroelectric dam in Belize. The new dam will help Fortis’s Belize subsidiary take advantage of growing demand for power as prosperity spreads. The dam can also earn cash by selling excess power to utilities in nearby Mexico.

Fortis’s stock has stayed in a narrow band for the past two years. But it is still attractive at 19.5 times the $1.23 a share it will probably earn in 2006, and at 8.5 times its projected cash flow of $2.82.

Fortis is a buy.

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