FORTIS INC. $23 (Toronto symbol FTS; SI Rating: Above average) operates regulated and non-regulated power systems in Canada, the United States, Belize and the Cayman Islands. It also owns hotels and commercial real estate properties, mainly in Atlantic Canada.
In 2004, the company paid $1.5 billion in cash and stock for regulated electrical utilities in Alberta and British Columbia. This helped cut Fortis’s income from its power operations in Atlantic Canada, from 50% of earnings to 30% in 2005.
However, Fortis’s earnings in the fourth quarter of 2005 only crept up to $22.3 million from $21.2 million a year earlier. That’s mainly because a settlement with Alberta regulators cut the Alberta subsidiary’s earnings in the latest quarter by $3 million. Per-share earnings remained unchanged at $0.21, while revenue grew 4.7%, to $353.1 million from $337.2 million.
Fortis’s cash flow is still growing strongly, up 15.8% in 2005 to $3.07 a share from $2.65 in 2004. Although the company spent roughly $5.00 a share on capital upgrades in 2005, partly due to the purchase of three hotels, the proceeds from the sale of common shares helped cover these costs. The new shares also cut Fortis’s long-term debt to 1.7 times equity from 1.9 times a year earlier.
In 2006, Fortis’s capital spending will likely drop to $4.40 a share. However, cash flow will probably slip to $2.85 a share, so Fortis will have to borrow the extra cash it needs. That should not hurt the company’s policy of annual dividend increases; the current rate of $0.64 yields 2.8%. But the extra interest costs will limit Fortis’s 2006 profits to $1.23 a share, and the stock now trades at 18.7 times that figure.
Fortis is a buy for long-term gains.
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