Portfolio Update
The FiveTwenty portfolio received no dividends in the past week.
| Past Week Dividend | $0 |
| Current Quarter Dividend | $84.57 |
| Estimated Annual Dividend | $845.23 |
| LifeTime Dividend | $84.57 |
The capital allocation for the week of 03/21/2021 to 03/27/2021 will be used to establish a position in Fortis (NYSE: FTS)
FTS – Company Profile
Fortis Inc (FTS) operates as an electric and gas utility company in Canada, the United States, and a number of Caribbean countries. FTS currently owns 10 affiliated electric and gas operations with C$55 billion in assets serving over 3 million customers. In Canada, the company serves customers in British Columbia, Alberta, Newfoundland and Labrador, Prince Edward Island, and Ontario. In the United States, FTS operates high-voltage electric transmission systems in Minnesota, Michigan, Iowa, Illinois, Missouri, Kansas, and Oklahoma under it’s ITC subsidiary; and electric and gas utilities in New York and Arizona. The companies Caribbean subsidiaries operate on Grand Cayman Island, Turks and Caicos Islands, and Belize. Official Site | Wikipedia
| Dividend Streak | 47 years |
| Yield | 3.67%* |
| Payout Ratio | 76.46%* (reported 75.57%) |
| P/E | 20.85* (reported 20.61) |
* computed using TTM adjusted EPS of C$2.57 as of Q4 2020
Financials
Does FTS have the financial means to sustain and raise its dividend going forward?
Over the last decade, FTS grew revenue from C$3.7 billion to C$8.9 billion through a combination of organic growth and acquisitions. Over the same period net income increased from C$311 million to C$1,209 million. Adjusted net income grew from C$311 million to C$1,195 million. The steady and consistent growth in adjusted net earning is even more impressive when we consider that adjusted net earnings grew faster than revenue (CAGR of 14.41% vs 9.17%).
In the last 10 years, FTS grew EPS and adjusted EPS as well. Adjusted EPS showed the same steady and consistent growth that we saw for adjusted earning, albeit at a slower rate (CAGR of 4.16%). This is not surprising given that the company has been issuing new shares to finance acquisitions. Furthermore, it is reassuring that the steady consistent growth we saw with adjusted net earnings carried over to adjusted EPS.
The average dividend per share growth rate was 6% per year in the past 10 years and 6% per year in the past 3 years. (per GuruFocus) Furthermore, FTS reiterated a 6% annual dividend growth guidance to 2025. Given the past success and future growth plans, we believe this dividend growth guidance is highly achievable. Furthermore, FTS managed the consistent increase in dividend per share while maintaining a payout ratio on adjusted EPS of 65% to 75%.
FTS in 2020
COVID-19’s impact on the company’s performance was relatively limited. The pandemic delayed TEP’s (Tucson Electric Power) general rate application, reduced sales in the Caribbean, and increased net operating expenses for all subsidiaries. However, FTS was able to absorb all these disruptions and continued its trend on growing revenues, adjusted net earnings, and adjusted EPS. (GAAP net earnings and EPS in 2019 were significantly boosted by one-time items such as the sale of the Waneta Expansion and reversal of prior liabilities at ITC. Therefore, adjusted net earnings and adjusted EPS provides a better measure of the company’s YoY performance.) Additionally, the company delivered Rate Base growth of 8.2% during the year.
Also in the 2020 annual report, FTS updated it’s five-year capital plan with a target of C$19.6. The company expects the plan to increase midyear Rate Base from C$30.5 billion in 2020 to C$40.3 billion by 2025. If met this would mean a five-year CAGR of about 6.0%.
Valuation
Are we paying too much for FTS at the current share price?
In the last 10 years, FTS’s P/E ratio saw a low of 12.48 and a high of 30.15, with a median value of 19.27. (per GuruFocus) Furthermore, for 7 of the last 10 years the P/E has been in a narrower bad of 19 to 21. The current TTM P/E ratio of 20.61 (20.85 on adjusted EPS) is slightly higher than historical median. However, that still puts the TTM P/E within the 19 to 21 band.
The current share price of C$53.59 is 5.2% above the 50-day moving average and 6% above the 200-day moving average. Additionally, the share price is at the top of the 52 week trading range.
FTS share price increased 10% since the end of February. However, we believe that the current share price offers a fair value entry point.
Yield
How does the current dividend yield for FTS compare to historical values?
In the last 10 years, the dividend yield for FTS has been in a range of 3.05% to 4.12%, with a media of 3.58%. (per GuruFocus) The current TTM yield of 3.67% is slightly above the historical media.
The yield range in the last 10 years has been quite narrow. Furthermore, given the stability of FTS’s underlying business, we expect the yield to remain within this narrow range in the near future. Therefore, we consider the current yield to be a decent starting yield.
Thesis
Why are we adding FTS to the FiveTwenty portfolio?
FTS operates a highly regulated business, 99% of its assets are accounted for by regulated utilities. Therefore, sources of revenue are extremely stable and recession resistant. Additionally, this also gives the company a high degree of confidence in its financial predictions. In turn that give us confidence in the guidance of Rate Base CAGR of 6% and 6% dividend growth over the next 5 years.
Other important factors in favor of FTS are the continued investment in renewable, carbon-free energy generation; and the corporate-wide emissions reduction target. In order to maintain long term viability, companies operating in the energy sector need to invest in clean energy and emissions reduction now.
Finally, we are adding FTS to the FiveTwenty portfolio, because we believe that the company will be able to keep up its streak of steady growth for years to come.
Additional Research
Photo by American Public Power Association on Unsplash
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