FORTIS INC. $40(Toronto symbol FTS; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 283.1 million; Market cap: $11.3 billion; Price-to-sales ratio: 1.7; Dividend yield 3.8%; TSINetwork Rating: Above Average; www.fortisinc.com) owns electrical utilities across Canada and in the U.S. and Caribbean. It also distributes natural gas in British Columbia.
In February 2016, Fortis agreed to buy ITC Holdings Corp. (New York symbol ITC), which owns 25,100 kilometres of high-voltage power lines in the U.S. Midwest.
Fortis is paying $6.9 billion U.S. in cash and shares; ITC shareholders will own 27% of the combined company. Fortis will also list its shares on the New York Stock Exchange; its shares will continue to trade in Toronto.
If you include ITC’s $4.4-billion U.S. debt, the total purchase price is $11.3 billion U.S. Fortis expects to complete the deal by the end of 2016.
Fortis will issue $2 billion U.S. in new bonds to help pay for ITC. That will add to the company’s long-term debt, which was $11.3 billion (as of December 31, 2015). Fortis also plans to sell 19.9% of ITC to a private investor.
Using acquisitions to expand adds risk. However, ITC’s regulated transmission lines give Fortis predictable revenue streams. They’re also a good fit with Fortis’s power plants and related operations in Arizona and New York State.
Buying ITC will also let Fortis profit from the U.S. government’s plan to encourage new wind farms and other renewable-energy projects. That should spur demand for transmission lines, particularly in the U.S. Midwest.
Excluding ITC, Fortis will probably earn $2.16 a share in 2016. The stock trades at a reasonable 18.5 times that estimate. In addition, adding ITC will help Fortis meet the goal of raising its dividend by 6% each year through 2020. The current annual rate of $1.50 a share yields 3.8%.
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