Fortis Inc. (FTS.TO)

A company that has made a few major acquisitions, but very successfully. When they made their first large acquisition in Texas, the Texans didn’t think they were going to be as successful as they have been. In the last year, they just closed the acquisition of ITC, a transmission company. This is a company that is well diversified, not only in its own industries, but across regulatory regimes, with a big solid footprint in the US. Dividend yield of 3.86%. (Analysts’ price target is $48.30.)

A great company. As a Canadian, if you have a normal portfolio, you are going to have some utilities, and this could definitely be one of them. His calculation of the cash payout ratio comes out to only 30%, which is actually low. From that perspective, they can continue their dividend. He would like to see their working capital position get a little stronger.

This looks like it has plateaued. He wouldn’t add new positions, but if he owned, he would take some off the table.

His only concern is if there is enough growth and dividend to chin the bar. The sector has been sideways. If rates start to rise, some of these companies have a lot of debt, which means the cost of carry when it rolls over is going to be higher.

Interest rates may already be priced into this. We know that at some time rates are going to go up and make utilities and REITs less attractive. At the end of the day however, this has a lot of growth projects in the hopper. Also, don’t forget, this is a regulated utility. As bond rates rise, they are allowed to go back to the regulated board and ask for higher returns on capital, which means they can increase their pricing. Feels the best years are behind this company, but you probably can still earn an outsized return owning this, versus a bond, cash or preferred shares. He would definitely hold this or buy on dips.

He likes it and would buy it here. They did some interesting acquisitions. 93% of it is a regulated utility. He thinks they will expand into the US. They will do well unless interest rates rise a lot.

A great name. It has very visible growth at 8% between now and 2018. Has big US exposure. There is an LNG project which is probably going to go ahead in Squamish BC, that they are going to benefit from. Nice dividend. 56% payout ratio. Trading below its five-year average, pretty cheap relative to its peers at around 18 times. However, this is a yield proxy, and rising bond yields are going to hurt it a little. However, it is trading low enough and its growth is good enough that you could just hold onto this and look to accumulate on weakness.

If you have some patience, and are not rushing to buy this, perhaps you could wait. At $44, the stock came hard against some pretty impressive technical resistance, and backed off about 10%. He would like it to come back another 10%.

Interest sensitive names have come off here. FTS-T has made a pretty significant transformation in going from Canada to the US. It will play out in his view. It is for income generation. To get to $45 he feels there would have to be a growth driver. Patience is a virtue. Management has done a good job. He does not think there is an issue servicing the debt. If rates went up dramatically, he would look more closely at exiting it.

Fortis (FTS-T) or Algonquin Power (AQN-T)? This is a good time to invest in either. Sharp interest rate increases are a risk, but she doesn’t expect that. In a rising rate environment, you want to buy companies that have the ability to increase their dividends, and hopefully the yields will also increase over time. This is in the midst of closing on a transaction in the US, which is going to broaden their geographic scope. They have indicated that they can grow their dividend in the mid to high single digit range for the next 4 years or so. She likes the visibility. This one would be her preference of the 2, and this is an attractive entry point.

Just made an acquisition in the US. With lower US taxes, they will have more cash available to start to pay off shareholders with higher dividends. They are also benefiting from a lot of coal fired plants turning to natural gas, which is still pretty cheap. As long as they keep drilling and supplying, they should be able to do well with their US operations. In the long run, he is not a big fan of electric utilities, only from the standpoint, in that there is that destructive technology risk. If Elon Musk gets a power pack on the side of every house, then everybody comes off the grid, and suddenly there is no need for transmission lines. His latest idea is having solar powered shingles on houses.

Fortis (FTS-T) or Emera (EMA-T)? This used to be Canada’s growth utility, and is still a growing utility, but Emera seems to have taken its place. Both companies have made major acquisitions in the US. Keep in mind that there is an interest rate risk for utilities. He wouldn’t have a huge percentage of your portfolio as these companies will be hurt by rising interest rates.

$36 model price. All interest bearing securities are overpriced. He thinks the stock will go to $32 which is book value.

One of the biggest regulated utilities in Canada. It doesn’t face a lot of the impacts of worries of pipelines. Has one of the longest track records of dividend increases, and expects you will continue to see more. It just got a US listing. Made a major acquisition in the US of a publicly traded company, and there could be some volatility when the deal closes. A great hold.

Has been buying this and thinks it is a first-rate utility going forward. They’ve done some acquisitions in the US. This provides investors with a clear-cut path to higher dividends.