John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
The stock market has suffered its share of nasty surprises lately – plunging commodity prices, sluggish domestic growth and China's slowdown, to name a few.
But amid all the gloom, one of my Strategy Lab stocks – Fortis Inc. – actually delivered a nice surprise: On Sept. 29, the gas and electric utility operator raised its dividend by 10.3 per cent to $1.50 a share annually from $1.36. At the new dividend rate, the stock yields 4 per cent based on Tuesday's closing price of $37.43 (down 87 cents).
Fortis has been raising its dividend for decades, but its latest increase was notable for a few reasons. First, it came early; the company usually raises its dividend in December. Second, it was more than twice as big as Fortis's average hike of about 4 per cent over the past five years. Third, when Fortis announced the increase, it also set a target of 6-per-cent annual dividend growth from 2016 through 2020.
Companies generally don't do these sorts of things unless they're feeling confident about the future, which is why the news should matter to investors.
"Fortis has achieved a number of significant goals that enhance value for our shareholders," Barry Perry, chief executive officer of St. John's-based Fortis, said in announcing the dividend increase and growth guidance.
Specifically, Fortis's two large U.S. gas and electric utility acquisitions – UNS Energy of Arizona in 2014 and Central Hudson of New York in 2013 – are "fully integrated and performing well," Mr. Perry said. The 335-megawatt Waneta Expansion hydroelectric project in British Columbia came online ahead of schedule in April. And Fortis recently divested its non-core commercial real estate portfolio and is selling its 22 hotels across the country.
What's more, in August, Fortis announced it had reached a settlement with Belize regarding the government's 2011 expropriation of Belize Electricity Ltd. The settlement calls for a $35-million (U.S.) cash payment to Fortis, which will maintain a 33-per-cent equity stake in Belize Electricity, the country's primary electricity distributor.
Looking ahead, Fortis's 6-per-cent dividend growth target isn't a slam dunk; the board still has to approve every dividend increase. But by publicly stating its dividend growth objective, Fortis is sending a clear signal that – barring something unforeseen – it will have the cash flow to meet the target.
"Our dividend guidance takes into account many factors, including these significant goals achieved, the expectation of reasonable outcomes for regulatory proceedings at our utilities, and the successful execution of the corporation's projected $9-billion, five-year capital plan," Mr. Perry said.
As a utility operator with $28-billion in assets, about 96 per cent of which are regulated, Fortis generates fairly predictable – and growing – cash flows. That stability is a key reason I own the shares both personally and in my Strategy Lab model dividend portfolio (view it online at tgam.ca/divportfolio).
The stock has had its ups and downs in recent years, but I've generally been pleased with its performance.
From the model portfolio's inception on Sept. 13, 2012, through Sept. 30, 2015, the shares gained 16.6 per cent, excluding dividends. Fortis's total return over that period – a theoretical measure that assumes all dividends had been reinvested in additional shares – was about 29.6 per cent. That works out to an annualized total return of 8.9 per cent, compared with about 5.5 per cent for the S&P/TSX composite index over the same period.
As a dividend growth investor, I also pay close attention to the income my stocks produce, and I've been pleased in that regard as well. When I initially "bought" Fortis in my Strategy Lab portfolio, the annual dividend was $1.20 a share. The company has since raised its dividend four times and the new dividend of $1.50 represents an increase of 25 per cent over the original amount. I have no doubt that my income from Fortis will continue to grow.
I'm so confident, in fact, that I'm going to put my "money" where my mouth is.
Back in 2013, when Fortis's stock had hit a rough patch, I added to my position because I was convinced the company had a bright future. That turned out to be a good move. Today, in light of the recent dividend hike and Fortis's new dividend growth guidance, I'm going to buy an additional 20 Fortis shares with the "cash" sitting in my Strategy Lab account. That brings my total Fortis investment to 150 shares.
In real life, I'm also counting on Fortis to continue delivering dividend hikes well in excess of the rate of inflation. For now I'm reinvesting all of my dividends, but in retirement I'll probably spend the cash from Fortis and other stocks to supplement my pension income.
No stock is risk free. A spike in interest rates, for example, could hurt shares of Fortis and other utilities. But while stock prices are notoriously unpredictable in the short term, I'm confident that in the long run – whether it's five, 10 or 20 years from now – Fortis's dividend will be substantially higher than it is today.