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Utility stocks are the Rodney Dangerfield of the investment world: They get no respect.
They don’t have the glamour of the high-tech companies. They lack the prestige of the big banks. They don’t excite the imagination like the entertainment giants or offer the romance of the travel industry.
Nope, none of the above.
All utilities do is quietly provide us with the electricity and natural gas that we rely on every hour of every day. No drama there. But there are profits for savvy investors.
For example, look at a company such as Fortis, which trades in Toronto and New York under the symbol FTS. It is based in St. John’s, which immediately sets it atop the “no respect” list for many people. After all, who sets up headquarters in St. John’s unless you’re in the fishing industry?
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Well, Fortis did, way back in 1885. It was originally known as the St. John’s Electric Light Company. Under various names, it continued to serve Newfoundland for more than 100 years. Then in 1990 it expanded outside the province by acquiring Maritime Electric, based in P.E.I. In 1996, it moved into Ontario, beginning a national and then international expansion that continues to this day.
Over that time, its assets grew from less than $ 1 billion to $ 47 billion today. Fortis is now the largest investor-owned gas and electricity distribution company in Canada. It has operations in five Canadian provinces, nine U.S. states, and three Caribbean countries.
This once tiny company is now an industry giant and is growing at a rate that would have astounded its original founders. In 2012 it expanded into the U.S. with the purchase of CH Energy Group of New York for $ 1.5 billion (U.S.). It followed that the next year with the $ 4.3-billion (U.S.) acquisition of Arizona-based UNS Energy. Then in 2016 it paid $ 11.6 billion (U.S.) to acquire ITC Holdings Corp., the largest independent transmission utility in the U.S. That price was more than 11 times the total value of the company only 21 years ago.
Fortis investors (of which I am one) have reaped big rewards. Back in 2000 you could have bought shares for less than $ 8. They are now trading in the range of $ 47-$ 48, a six-fold increase over that time.
But people don’t buy Fortis, or any other utility for capital gains. Most investors are more interested in stability and cash flow.
Utilities are unlike most other industries in that their prices and profits are regulated. Each jurisdiction in which they operate has a regulatory commission that determines how much they can charge consumers and imposes other restrictions on their business. That’s the price you pay for being a monopoly, or close to it.
This is both a curse and a blessing. These companies do not have the freedom to raise prices at will but at the same time their revenue base is protected, assuring them of a predictable income stream even during times of recession.
As far as dividends are concerned, Fortis is as dependable a cash cow as you’ll ever find. The company recently announced a 6.25 per cent increase in its quarterly payout. It marks the 44th consecutive year the company has raised its dividend. Fortis says it expects to continue annual dividend hikes in the 6 per cent range until at least 2022. The shares yield 3.6 per cent at the current price.
Only one other company has a better record for consecutive dividend increases and it too is a utility. Calgary-based Canadian Utilities has raised its payment for 45 years in a row.
Utilities are interest-sensitive stocks so in theory they should be out of favour during a time of rising rates. But the S&P/TSX Utilities sub-index was up 6.5 per cent year to date at the time of writing. That’s almost two points better than the Composite, which suggests that investors are more interested in stability and dividends than they are about the impact of rate hikes on these companies.
So if you want excitement, buy Amazon or Apple. But if you want steady income with minimal risk, dull old utilities belong in your portfolio.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.