Fortis: A Compelling Case for Utilities Sector Exposure with Regulatory Tailwinds and Dividend Growth

The recent upgrade of Fortis Inc. (TSE:FTS) by CIBC to "Outperform" with a price target of C$70 has reignited interest in the stock among income-focused and growth-oriented investors alike. This move, coupled with bullish adjustments from TD Securities, UBS, and Jefferies, underscores a growing consensus that Fortis is uniquely positioned to capitalize on regulatory tailwinds, infrastructure demand, and a disciplined capital structure. For investors seeking a high-quality utility play with predictable cash flows and long-term earnings upside, Fortis offers a compelling case to consider.

Regulatory Tailwinds and Rate-Base Growth: A Catalyst for Earnings

Fortis's recent performance has been driven by favorable regulatory environments in its core markets. The company's 2025–2027 rate framework in British Columbia, for instance, provides clarity on operating expenses and capital investments, while also allocating funds for cleaner energy initiatives. These frameworks are critical for utilities, as they ensure that companies can recover costs and generate returns on investments in infrastructure.

Analyst Brent Stadler of Desjardins Securities highlights that Fortis has averaged 6.9% annual rate base growth and 5.2% earnings per share (EPS) growth over the past five years. This trajectory is expected to continue, with Stadler forecasting 6.5% compound annual growth in rate base and 5–6% EPS growth through 2030. Such consistency is rare in the sector and positions Fortis as a defensive play in volatile markets.

The company's U.S. operations, particularly in Arizona, add another layer of growth potential. Arizona's booming data center and manufacturing industries are driving load growth, which translates into higher demand for Fortis's transmission infrastructure. With a 10.73% return on equity (ROE) on its transmission lines and a 60% equity thickness (a measure of financial strength), Fortis is well-positioned to benefit from this trend.

Valuation Metrics: Reasonable Premium for Quality

Fortis's valuation appears attractively priced relative to both historical averages and sector peers. As of July 2025, the stock trades at a P/E ratio of 19.89, which is above its 5-year average of 18.86 but still below peers like Enbridge (P/E of 21.12) and TELUS (P/E of 28.69). This suggests Fortis is trading at a moderate premium for its quality and growth profile.

The company's debt-to-equity ratio of 1.43 may raise eyebrows, but it's important to note that over 90% of Fortis's debt is long-term, with 60% fixed-rate. This structure mitigates refinancing risks in a low-rate environment and supports its $26 billion capital plan, which aims to grow its rate base to $53 billion by 2029. Meanwhile, Fortis's dividend yield of 3.79%—well above the 3.0% sector average—reflects its strong earnings coverage and commitment to shareholder returns.

Dividend Growth: A Cornerstone of Value

Fortis's dividend growth story is one of its most attractive features. The company has raised its dividend annually for over a decade and provides guidance of 4–6% annual growth through 2029. With a payout ratio of 73%, the dividend is well-supported by earnings, though it's worth noting that free cash flow coverage is not explicitly disclosed. For income investors, this combination of yield and growth is hard to ignore, especially in a low-interest-rate environment where alternatives like bonds offer less upside.

Risks and Considerations

While Fortis's fundamentals are strong, investors should remain mindful of sector-specific risks. Regulatory changes, particularly in the U.S., could impact rate approvals. Additionally, the company's exposure to climate-related policies—such as its goal to reduce emissions by 50% by 2030—requires ongoing investment in clean energy, which could strain margins if costs rise. However, Fortis's stable credit ratings (Baa3 from Moody's, A (low) from DBRS) and proactive approach to sustainability suggest these risks are manageable.

Strategic Rationale for Utilities Sector Exposure

The utilities sector, broadly speaking, has become a more attractive asset class in 2025. The sector's median P/E of 18 is supported by robust earnings growth and improving balance sheets, with the debt-to-equity ratio dropping to 0.05 by Q2 2025. Fortis, with its higher leverage, trades at a slight premium but offers superior visibility on earnings and dividends. For investors seeking to hedge against macroeconomic uncertainty while participating in infrastructure-led growth, Fortis represents a rare combination of defensive qualities and growth potential.

Conclusion: A Buy for Long-Term, Income-Focused Investors

The CIBC upgrade to "Outperform" is more than a ratings change—it reflects a shift in sentiment toward Fortis's ability to navigate a complex energy transition while delivering consistent returns. With regulatory tailwinds, a disciplined capital plan, and a dividend growth track record, Fortis stands out as a high-quality utility stock in an otherwise mixed sector. While the stock's valuation is not cheap, its earnings upside and yield make it a compelling buy for investors seeking long-term, stable growth in a sector poised for structural investment.

For those looking to gain exposure to the utilities sector through a single, well-managed name, Fortis offers a balanced blend of income and growth—a rare combination in today's market.