As investors in individual stocks, one of the goals should be to reduce risk of losing money. This can be done by choosing stocks that are known as blue chips. Blue chips cost more but tend to hold their value.
Another way to reduce risk is to do a valuation of a stock. Valuation is not an exact science but an investor can do an analysis on what the stock is worth.
This number on what price the stock is worth compared to the actually price of the stock will indicate if the stock is undervalued or overvalued.
Ultimately, you want to purchase a stock far below the price determined by doing a valuation analysis. The lower the purchase price the better. The lower the purchase the greater the starting yield, which means your money will be working harder for you.
Fortis is a leading utility in North America that is headquartered in St. John's, Newfoundland and Labrador. Fortis Inc. started in 1885 under the St. John's Electric Light Company in what would become the province of Newfoundland. The St. John's Electric Light Company eventually came the Newfoundland Light and Power Co. Ltd. The latter eventually became the first subsiduary of Fortis Inc in 1987.
Fortis is a holding company that operates under various subsidiaries in the utility space.
Fortis has over 9000 employees and serve their customers in Canada (5 provinces) , 9 American states and 3 countries in the Caribbean. Fortis has $53 billion in total assets at the end of 2019. The customer base consists of 1.3 million gas utility customers and 2 million electric utility customers.
Now, we will look at the fundamentals of the stock. Fortis Inc. trades on the Toronto Stock Exchange and New York Stock exchange as FTS.
As I am in Canada, I will use the Toronto Stock Exchange FTS quote in my analysis.
Currently, Fortis is trading at $53.25 at the close of May 8, 2020. Fortis pays an annual dividend of $1.91 per share, or $0.4775 per share. The stock is currently yielding 3.59%. This yield is 10 bps below the stock's own 5 year average and 30 bps below that of the broader market.
The EPS per the trailing twelve months (TTM) is $3.73. The dividend payout ratio is 51.2%. This is a great dividend payout ratio showing half of the earnings are going to investors while the other half as retained earnings.
At the end of fiscal year 2019, 99% of earnings came from regulated utilities.
The 5yr dividend growth rate is 7.4%. The 10yr dividend growth rate is 5.8%.
Fortis has raised their dividend for 46 consecutive years. This is the second highest streak in Canada.
People use utilities to live their everyday lives. So, in good and bad times the company makes money. In the current COVID19 pandemic, earnings could take a hit from the industrial and commercial side of the business as a lot of places are shut down. The earnings from residential customers will increase as people are home more and therefore using their utilities more than normal.
Now, we will take a lot at the some fundamentals over the last 10 years. Although third party information, like Morningstar, is quite accurate, it is best to get the information from annual reports from Fortis directly. The fiscal year for Fortis ends December 31, which is same as regular calendar year.
Fortis grew revenues from $3.664 billion in 2010 to $8.783 billion in 2019. This is a compound annual growth rate (CAGR) of 10.33%.
This CAGR is fantastic. During this time, the price of oil has been varied from near a $100 per barrel to $30 a barrel. The lower the price of oil means higher earnings due to lower cost.
We next take a look at diluted EPS over the last 10 years. Fortis grew diluted EPS from $1.62 per share in 2010 to $3.78 per share in $3.78 per share. This is a CAGR of 9.87%.
A CAGR near 10% for EPS was helped by 3 major acquisitions.
The number of shares outstanding has increased by 134% over the last 10 years. During the last 10 years Fortis had 3 major acquisitions to grow their assets.
I expect the EPS to continue to grow over the long term, but be reduced in the short term. The EPS will likely decline in the short term as most of their industrial or commercial customers have been shut down to help reduce the spread of COVID19. Although their residential customers have been increasing their use of utilities during the COVID19 pandemic, the increase in revenues will not come anywhere close to replacing the losses via by their industrial and commercial customers. The economy is starting to open up, but is will be a slow recovery as things will have to be done differently by individuals and businesses.
The long term debt to equity ratio comes in at 1.16. The interest coverage ratio is 3.06.
The higher the interest coverage ratio the better. The interest coverage ratio is a measure of the ability of a company to pays the interest on its debt. Ideally, I would look for an interest coverage ratio of minimum 5. I am not too concerned with Fortis ability to pay its debt due to earnings will be helped by the low price of oil and costs being reduced via increase of renewable energy.
Fortis has an average annual net margin of 12.59% over the last 5 years. Net margin is basically what percentage of revenue hits the bottom line after every expense is accounted for. The net margin fell a bit in 2016 but increased in the next 3 fiscal years.
Fortis has an average return of equity of 8.16% over the last 5 years.
Investing in Fortis has served investors well over the last 10 years. As utilities allowed people to live their lives and to run the industries and businesses in various aspects of the economy, the company is highly recession proof.
We do not want to over pay for a stock. Ultimately, we want to purchase a stock for less than we think it is worth. By doing this, we have a large margin of safety. The lower you purchase a stock, the higher the starting yield which means your money is working harder for you right from the start.
Valuation
The stock is currently trading at P/E of 14.35. This is well below the stock's 5 year average of 19.7 and slightly above that of the broader market (TSX Composite Index) of 12.2.
The stock is basically on par in terms of price to book and price to sales when compared to the stock's 5 year average.
The stock is currently trading at P/CF (Price to cash flow) of 8.8. This is on par with the stock's own 3 year average of 7.6. The current P/CF is also on par with that of the broader market of 7.9.
With these numbers that stock does not look appealing at $53.25.
I will attempt to value the stock using a dividend discount model analysis. I am going to use a discount rate of 9%. I choose 9% as this represents what I am for in terms of annual return with a stock with a current yield of 3.6%. I am going to use a dividend growth rate of 5.5% growth rate. This is slightly lower than the aim of Fortis to grow their dividend annually at 6% to 2024.
The Dividend Discount Model Analysis gives me a fair value of $57.57.
I want to compare this to a 3rd party to see if my analysis is reasonable.
Morningstar currently rates Fortis as a 3 star stock. This would mean the stock is equally valued.
Morningstar has a fair value of $54.76.
I take the average of these 2 numbers to get a fair value of $56.16.
Conclusion:
The stock could be possibly be 5.2% undervalued.
I would not be a buyer currently as I believe the margin of safety is too low. Valuing a stock is not an exact science.
Disclosure: I do not own FTS.TO in any of my accounts.
Photo credit www.fortisinc.com
DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
Fortis has over 9000 employees and serve their customers in Canada (5 provinces) , 9 American states and 3 countries in the Caribbean. Fortis has $53 billion in total assets at the end of 2019. The customer base consists of 1.3 million gas utility customers and 2 million electric utility customers.
Now, we will look at the fundamentals of the stock. Fortis Inc. trades on the Toronto Stock Exchange and New York Stock exchange as FTS.
As I am in Canada, I will use the Toronto Stock Exchange FTS quote in my analysis.
Currently, Fortis is trading at $53.25 at the close of May 8, 2020. Fortis pays an annual dividend of $1.91 per share, or $0.4775 per share. The stock is currently yielding 3.59%. This yield is 10 bps below the stock's own 5 year average and 30 bps below that of the broader market.
The EPS per the trailing twelve months (TTM) is $3.73. The dividend payout ratio is 51.2%. This is a great dividend payout ratio showing half of the earnings are going to investors while the other half as retained earnings.
At the end of fiscal year 2019, 99% of earnings came from regulated utilities.
The 5yr dividend growth rate is 7.4%. The 10yr dividend growth rate is 5.8%.
Fortis has raised their dividend for 46 consecutive years. This is the second highest streak in Canada.
People use utilities to live their everyday lives. So, in good and bad times the company makes money. In the current COVID19 pandemic, earnings could take a hit from the industrial and commercial side of the business as a lot of places are shut down. The earnings from residential customers will increase as people are home more and therefore using their utilities more than normal.
Now, we will take a lot at the some fundamentals over the last 10 years. Although third party information, like Morningstar, is quite accurate, it is best to get the information from annual reports from Fortis directly. The fiscal year for Fortis ends December 31, which is same as regular calendar year.
Fortis grew revenues from $3.664 billion in 2010 to $8.783 billion in 2019. This is a compound annual growth rate (CAGR) of 10.33%.
This CAGR is fantastic. During this time, the price of oil has been varied from near a $100 per barrel to $30 a barrel. The lower the price of oil means higher earnings due to lower cost.
We next take a look at diluted EPS over the last 10 years. Fortis grew diluted EPS from $1.62 per share in 2010 to $3.78 per share in $3.78 per share. This is a CAGR of 9.87%.
A CAGR near 10% for EPS was helped by 3 major acquisitions.
The number of shares outstanding has increased by 134% over the last 10 years. During the last 10 years Fortis had 3 major acquisitions to grow their assets.
I expect the EPS to continue to grow over the long term, but be reduced in the short term. The EPS will likely decline in the short term as most of their industrial or commercial customers have been shut down to help reduce the spread of COVID19. Although their residential customers have been increasing their use of utilities during the COVID19 pandemic, the increase in revenues will not come anywhere close to replacing the losses via by their industrial and commercial customers. The economy is starting to open up, but is will be a slow recovery as things will have to be done differently by individuals and businesses.
The long term debt to equity ratio comes in at 1.16. The interest coverage ratio is 3.06.
The higher the interest coverage ratio the better. The interest coverage ratio is a measure of the ability of a company to pays the interest on its debt. Ideally, I would look for an interest coverage ratio of minimum 5. I am not too concerned with Fortis ability to pay its debt due to earnings will be helped by the low price of oil and costs being reduced via increase of renewable energy.
Fortis has an average annual net margin of 12.59% over the last 5 years. Net margin is basically what percentage of revenue hits the bottom line after every expense is accounted for. The net margin fell a bit in 2016 but increased in the next 3 fiscal years.
Fortis has an average return of equity of 8.16% over the last 5 years.
Investing in Fortis has served investors well over the last 10 years. As utilities allowed people to live their lives and to run the industries and businesses in various aspects of the economy, the company is highly recession proof.
We do not want to over pay for a stock. Ultimately, we want to purchase a stock for less than we think it is worth. By doing this, we have a large margin of safety. The lower you purchase a stock, the higher the starting yield which means your money is working harder for you right from the start.
Valuation
The stock is currently trading at P/E of 14.35. This is well below the stock's 5 year average of 19.7 and slightly above that of the broader market (TSX Composite Index) of 12.2.
The stock is basically on par in terms of price to book and price to sales when compared to the stock's 5 year average.
The stock is currently trading at P/CF (Price to cash flow) of 8.8. This is on par with the stock's own 3 year average of 7.6. The current P/CF is also on par with that of the broader market of 7.9.
With these numbers that stock does not look appealing at $53.25.
I will attempt to value the stock using a dividend discount model analysis. I am going to use a discount rate of 9%. I choose 9% as this represents what I am for in terms of annual return with a stock with a current yield of 3.6%. I am going to use a dividend growth rate of 5.5% growth rate. This is slightly lower than the aim of Fortis to grow their dividend annually at 6% to 2024.
The Dividend Discount Model Analysis gives me a fair value of $57.57.
I want to compare this to a 3rd party to see if my analysis is reasonable.
Morningstar currently rates Fortis as a 3 star stock. This would mean the stock is equally valued.
Morningstar has a fair value of $54.76.
I take the average of these 2 numbers to get a fair value of $56.16.
Conclusion:
The stock could be possibly be 5.2% undervalued.
I would not be a buyer currently as I believe the margin of safety is too low. Valuing a stock is not an exact science.
Disclosure: I do not own FTS.TO in any of my accounts.
Photo credit www.fortisinc.com
DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
