U.S. push helps spur Fortis dividend


Fortis LISTEN:  

FORTIS INC. $47 (Toronto symbol FTS; Income-Growth Portfolio, Utilities sector; Shares outstanding: 426.6 million; Market cap: $20.1 billion; Dividend yield 3.8%; Dividend Sustainability Rating: Highest; www.fortisinc.com) began supplying electricity to St. John’s, Newfoundland, in 1885. The company is now the main power utility in that province as well as PEI. It also owns electrical utilities across Canada, the U.S. and the Caribbean. In addition, the company distributes natural gas in British Columbia, Arizona and New York State.

With the December 2018 payment, the company increased its quarterly dividend by 5.9%, to $0.45 a share from $0.425. The annual rate of $1.80 yields a high 3.8%.

Fortis has now increased its dividend each year for the past 45 years. The company intends to raise that annual payment by about 6% each year through 2023.

To cut its reliance on Atlantic Canada, the company has acquired other power utilities in other parts of Canada and the U.S.

ITC was Fortis’s largest acquisition to date

Those include its October 2016 purchase of ITC Holdings Corp. for $7.0 billion U.S. in cash and shares. ITC owns 25,100 kilometres of high-voltage power lines in the U.S. Midwest. Including ITC’s $4.8 billion U.S. debt, the total purchase price was $11.8 billion U.S. Fortis then sold a portion of ITC to Singapore’s sovereign wealth fund for $1.2 billion U.S.

As a result of its new businesses, Fortis’s revenue jumped 105.1%, from $4.05 billion in 2013 to $8.3 billion in 2017.

Due to costs to integrate its new operations, Fortis’s overall earnings declined 3.8%, from $400 million in 2013 to $385 million in 2014. Due to more shares outstanding, earning per share fell 19.0%, from $1.74 to $1.41.

Fortis’s earnings then jumped to $2.61 a share (or a total of $840 million) in 2015, but fell to $1.89 a share (or $713 million) in 2016. Thanks to a full-year contribution from ITC, the company’s earnings rose to $2.32 a share (or $1.13 billion) in 2017.

If you factor out all unusual items, Fortis’s earnings rose from $2.31 a share (or $715 million) in 2016 to $2.53 a share (or $1.05 billion) in 2017.

In the three months ended September 30, 2018, earnings rose 8.7%, to $276 million from $254 million a year earlier. Due to more shares outstanding, earnings per share gained just 6.6%, to $0.65 from $0.61. Revenue also improved 7.3%, to $2.04 billion from $1.90 billion. The higher results are mainly due to gains from the ITC purchase.

Regulated projects cut risk

Between 2019 and 2023, Fortis plans to spend $17.3 billion on capital projects. That’s up $2.8 billion from its earlier plan.

Most of that spending will go toward improving the reliability of its regulated utilities. As a result, it’s likely that regulators will let the company pass along most of the costs of those upgrades to its customers. Fortis also plans to sell $1 billion to $2 billion worth of its less-important assets.

The company’s earnings will probably rise from a projected $2.55 a share in 2018 to the forecast $2.66 for 2019. Fortis at a reasonable 17.7 times the 2019 estimate.

Fortis is a buy.

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