Fortis (TSE:FTS) Will Pay A Larger Dividend Than Last Year At CA$0.54

By
Simply Wall St
Published
November 20, 2021
TSX:FTS
Source: Shutterstock

Fortis Inc. (TSE:FTS) has announced that it will be increasing its dividend on the 1st of March to CA$0.54. The announced payment will take the dividend yield to 3.7%, which is in line with the average for the industry.

View our latest analysis for Fortis

Fortis' Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Fortis was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. This is a pretty unsustainable practice, and could be risky if continued for the long term.

EPS is set to grow by 7.6% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 79%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.

historic-dividend
TSX:FTS Historic Dividend November 21st 2021

Fortis Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from CA$1.16 in 2011 to the most recent annual payment of CA$2.14. This means that it has been growing its distributions at 6.3% per annum over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

We Could See Fortis' Dividend Growing

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Fortis has seen EPS rising for the last five years, at 6.8% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Fortis' Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Fortis will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Fortis that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.

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