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Why Fortis Stock Is a Hidden Gem Among Dividend Kings

Golden crown on a red velvet background
Image source: Getty Images

Written by Andrew Button at The Motley Fool Canada

Fortis Inc (TSX:FTS) recently acquired the status of “Dividend King” – a stock with 50 consecutive years of dividend increases. The company did so by announcing its 50th consecutive hike in its most recent earnings release. Fortis has long been popular with Canadian dividend investors, but until now has been relatively unknown internationally. There are only 49 companies on S&P Global’s “Dividend King” list, so Fortis is in rare company. Those who follow S&P’s indexes will be more likely to hear about Fortis in the future, which could possibly drive appreciation in the stock price.

A rare Canadian Dividend King

Currently, Fortis is one of the only Canadian Dividend King stocks. Most Dividend Kings are based in the U.S., a few are European. It’s a small club. In order to achieve 50 years of dividend increases, a company has to clear some big hurdles. It has to have some earnings growth. It has to not be prevented from increasing dividends by a regulator. It has to have executives who consider dividends a positive. Very few companies pass all of these screens for 50 years running. So, the number of Dividend King stocks is very small.

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This fact could end up being a boon to Fortis’ shareholders in the short term. Officially, a “Dividend King” is any stock on S&P’s list of dividend Kings. Fortis will be one of a small handful of Canadian companies on the list when it is next updated. That could bring the company to the attention of fund managers who wouldn’t have thought of it previously. That in turn could trigger buying which could elevate Fortis’ stock price.

I should say that were this to happen, it would be a “one time” event, and would not drive continued returns for those who bought after the index inclusion. Additionally, if Fortis were to miss a future dividend hike, it would drop off the Dividend King list and probably go down in price. Which leads us to the next point…

Can Fortis stock keep up the dividend growth?

For Fortis’ Dividend King status to drive lasting returns, the company will need to continue its dividend growth. You don’t get to be a Dividend King by hiking your payout 50 times then never again. You need to keep up the momentum indefinitely!

Can Fortis keep it up?

Here’s what we know:

  • As a regulated utility, it has an advantage in revenue stability. Usually when regulated utilities see their earnings’ decline, it’s because they messed something up on the cost side, while their revenue stability is the best of any sector.

  • Fortis has historically invested more in growth than the average utility has.

  • The company is in the midst of a $5 billion capital spending plan that it says will increase its rate base. Supposedly one of the things it will do with this spending is bring its services to remote communities that aren’t on the grid – that should drive some revenue growth.

So, yes, at least in theory, Fortis could maintain its Dividend King status for a while to come. I wouldn’t run out and buy the stock for no other reason than “it’s a Dividend King,” but if Dividend Kings are the kinds of stocks you like, FTS merits further research.

The post Why Fortis Stock Is a Hidden Gem Among Dividend Kings appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

2023