Last week, a reader wrote to complain about Fortis Inc. stock (FTS-T, FTS-N).
He had enjoyed seeing the stock rise for several years and collecting his ever-increasing dividends in the process. But now the share price is going down. He said he was frustrated by this and is planning to sell.
Well, hold on just a minute here.
Fortis has been a recommendation of my Internet Wealth Builder since 2005, and, in that time, it has rewarded investors handsomely. The company is an international distributor of electricity and natural gas with operations in Canada, the U.S., and the Caribbean. It has raised its dividend annually for more than 40 consecutive years.
So, has something happened that suddenly makes Fortis a bad company? No.
Annual results won't be released until Feb. 15, but third-quarter results (to Sept. 30) showed steady progress. The company reported adjusted net earnings attributable to common shareholders of $254-million (61 cents per share). That was an increase of 7 cents per share over the same period in 2016. On a year-to-date basis, adjusted net earnings were $794-million ($1.92 per share), an increase of 26 cents per share over 2016.
Cash flow from operating activities totalled $2-billion for the nine months, an increase of 41 per cent over the same period in 2016.
A large part of the improvement in profits and cash flow relates to the acquisition of Michigan-based ITC Holdings Corp. in the fall of 2016 for US$11.3-billion. ITC is an electrical transmission company with a network of 25,000 kilometres of lines. Fortis also purchased Arizona-based UNS Energy Corp. for US$2.5-billion in 2013 and New York-based CH Energy Group Inc. for US$1.5-billion in 2012. The net result is that the company now derives more than half its profits from its U.S. holdings.
Fortis is moving aggressively to build on these acquisitions. It plans to spend $14.5-billion over the next five years (2018-22), up $1.5-billion from the prior year's plan. This includes $350-million on a gas pipeline project in B.C. and an ambitious transmission line under Lake Erie to connect Ontario to the U.S. market.
However, no more acquisitions are contemplated, at least for now.
"After a very strategic and successful expansion into the United States, the corporation is now focused on sustainable investment in its existing utilities," said CEO Barry Perry. "The opportunities that we are pursuing will enhance our ability to serve customers safely and reliably, grow our rate base, and support our 6 per cent average annual dividend growth target."
Speaking of dividends, the company announced in October its 44th consecutive annual dividend increase. The 6.25-per-cent hike was effective with the Dec. 1 payment and raised the monthly payout to 42.5 cents ($1.70 per year).
So, what is the problem? Why is our reader so unhappy?
It's because the stock has dropped in value in recent weeks. Fortis hit an all-time high of $48.73 in mid-November. Since then the price has been in a steady decline, closing in Toronto on Feb. 12 at $41.30. That's down 15.2 per cent from the high.
Why? Because interest rates are rising. I have written about this several times before. Utility stocks, like REITs and to some degree telecoms, are adversely affected by rising rates.
There are two reasons for this. First, these companies typically carry a lot of debt so rising rates mean that their cost of borrowing will increase over time. Second, as the yields on safe securities such as government bonds increase, investors want a better return on higher risk securities like stocks.
At its high, the yield on Fortis stock was 3.5 per cent. At a price of $41.30, the yield is 4.1 per cent, which is more in line with the spread investors are looking for between government bonds and dividend stocks.
And this is probably not the end. If rates rise more, as expected, Fortis shares may continue to decline. You'll still receive your dividends on a quarterly basis, but the total value of your holdings will decrease for a period.
This does not mean there is anything wrong with the company. It's just the way the market works. Investors benefited from higher share prices when interest rates fell. Now we are looking at the other side of the coin.
If you are unhappy with this scenario, then sell and look for other alternatives. But remember, most dividend stocks will be in a similar position. The main exception is the financial services sector as the profit margins of the banks and insurers improve when rates rise.
As for Fortis, the company will continue to prosper and keep raising its dividend every year. And when rates turn down again, which they eventually will, the shares will move higher. That's the way it has always worked and it's not going to change now.
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Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney
Gordon Pape