Reader Request - Fortis Inc (TSE:FTS)
31 August 2007Dividends Matter reader Telly has requested that we have a look at an old, stodgy electrical utility by the name of Fortis Inc which trades on the TSE under the symbol FTS. A consistent dividend payer, but worthy of our portfolio of superior dividend yielding stocks? Let’s find out together.
Company Profile:
From ADVFN Financials
The Company has 6 electric distribution utilities located in Newfoundland and Labrador, Prince Edward Island, Ontario, Belize and the Cayman Islands. It also has 2 subsidiaries engaged solely in electricity generation in New York State and Belize.
Market capitalization of $4.03B.
Company Fundamentals:
Starting with management’s performance, we will have a look at the return on invested capital (ROIC) and the return on equity (ROE).
The ROIC is quite low. Although I only have 5 years worth of ROIC data, it is clearly consistent and consistently below 5%. The 5 year average ROIC is 3.6%. However, this seems typical of these utility companies (for example, Consolidated Edison Inc).
The ROE is better and has been improving over the last 10 years. The 10 year average ROE is 9.9%. The 5 year average improves slightly to 10.76%. Total debt makes up 67% of capital. The difference from ROIC to ROE shows that management has been able to effectively leverage that debt.
Equity growth rate had been climbing up nicely. The 9 year rate is 8.24%. The 5 year rate improves to 10.72%. The 3 year rate is 11.44%. But last year’s equity growth rate came in at 5.55%.
Earnings per share growth rate has been more inconsistent but has been coming on strong as of late. The 9 year rate is 11.89%. The 5 year rate drops to 8.97%. But the 3 year rate climbs to 10.41% and last year’s EPS growth rate was 13.45%. Promising.
Sales growth rates had been performing well - up until last year. The 9 year rate is 14.83%. The 5 year rate climbs to 20.78% and remains at 20.61% over 3 years. But last year’s rate dropped to a measly 2.24%.
From the fundamentals, there is nothing too exciting. About what I would expect from a utility company.
Dividend Fundamentals:
The current dividend yield is 3.29%. That is better than the dividend yield on the S&P/TSX Composite Index.
One of our most crucial growth rates is the dividend growth rate. In this case, there is definitely a very healthy increasing dividend growth rate over the last 10 years. The 9 year rate is 4.3%. The 5 year rate increases to 7.13%. The 3 year rate further increases to 8.82%. And last year’s dividend growth rate was 13.95%. Considering that most of the company fundamental growth rates dropped off last year, it is interesting to see that it was their best dividend growth rate year. Management seems committed to increasing dividends.
The dividend payout ratio currently sits at 49.63%. Although that seems high, it has been dropping steadily over the last 10 years .
Cash flow growth rates have been very consistent with the 9 year rate at 9.8%, the 5 year rate at 11.8% and last year’s cash flow growth rate as 10.64%.
Valuation Models:
Let’s use my 3 methods for determining a fair price for this stock.
From a historical dividend yield perspective, this stock has definitely payed a higher dividend yield. The 10 year average high dividend yield is 4.87%. The 5 year average high dividend yield is 3.91%. If we demand the 5 year rate, then the model price works out to $17.27. At the current price of $25.50, that implies a premium of 47.69%.
Mr. Benjamin Graham would agree. The Graham number works out to $18.93 or a 34.69% premium over the current price.
For my discounted present value method, I used the following inputs:
- future P/E of 15.60 (the 5 year average P/E. Current P/E is on the high end at 19.62)
- future EPS growth rate of 8.24% (the 9 year equity growth rate. Unfortunately, I was not able to find an analyst forecast on this stock.)
- dividend yield of 3.91% (the 5 year average high dividend yield)
- future dividend growth rate of 7.13% (the 5 year dividend growth rate)
With this information, the model price works out to $20.30. This implies a premium of 25.62%. But as you can see, at that price, I would not be earning my minimum 3.91% dividend yield.
Here is my dividend analysis of FTS.
Here is the 1 year stock price chart:
Conclusion:
This is a big, stodgy electrical company that consistently pays a decent dividend. Of course, it is regulated and thus any increases to its customers must be approved. So that definitely limits their flexibility.
There have been some encouraging signs such as the increasing dividend growth rate. But this is definitely a stock that you want to buy with a great dividend yield to start because the dividend growth rate is not overly aggressive. All 3 valuation methods find this stock currently trading at a fairly hefty premium.
Full Disclosure: I do own shares in FTS. They were purchased during my DRIP phase when I was buying up any Canadian company that offered a DRIP.
Popularity: 11%
Related posts that may interest you:
If you enjoyed this post, make sure to subscribe to my RSS feed.
Email This Post
Loading ...
on August 31st, 2007 at 11:11 am
AJ,
Thanks for answering my request. I always enjoy your analyses! Looks like this one will need to come down a fair bit before being seriously considered.