Stock market investing is an inherently riskier way to invest your money compared to parking it in a high-interest savings account. While you will slowly grow the amount of cash in such an account through interest income, the interest rates rarely keep pace with inflation. In the long run, the value of cash sitting idle in an account can diminish due to higher inflation rates.
While riskier, stock market investing can help you grow your wealth and outpace inflation. Building up a solid and well-balanced self-directed investment portfolio can set you up for far more wealth growth than the interest you earn by letting your money sit idle in an account as cash.
Fortis Inc. (TSX:FTS) is a staple holding in any solid investment portfolio, especially those focused on income. FTS is one of Canada’s top utility stocks, known for its reliable performance, regular dividend payouts, and an incredible 50-year dividend growth streak.
Utility stocks are typically considered boring but dependable investments. But where will this blue-chip utility stock be in the next five years? Let’s see where it’s at right now and consider the potential scenarios we might see in the near future.
Fortis right now
As of this writing, Fortis stock trades for $64.68 per share, hovering around new all-time highs after a few years of up-and-down movement. At current levels, it pays its shareholders a 3.8% dividend yield, supported by a solid business model. Fortis is a staple because of its ability to deliver shareholders their returns through reliable dividend payouts.
During economic downturns, consumers look for ways to reduce spending. Discretionary spending of any kind is the first thing to go out of the window. However, nobody will cut off their utilities in favour of purchasing high-end luxury brands when the going gets tough. The sheer demand for its services means Fortis stock can continue generating strong cash flows no matter what happens.
Most of the utility holding company’s assets have long-term contracts in a highly regulated market. It means that the company generates predictable cash flows, letting management make better-informed decisions regarding capital expenses and funding dividend growth. To understand where Fortis might be in the next five years, let’s look at the past to inform our assumptions.
Fortis over the last decade
Over the last 10 years, Fortis has experienced different price-to-earnings (P/E) ratios. The highest was 24.5, and it went as low as 16.3, with the average being around 18. Assuming that Fortis continues following historical trends, the P/E ratios can help us consider a few possibilities for the future.
If you assume an optimistic situation, where its P/E grows to 22.5 by 2030, the price can go above $92 per share. This can reflect 8% in annualized capital gains. Assuming it maintains an 18.9 P/E, the stock might rise to just around $78 per share by 2030, reflecting a 4.3% annualized gain. If the outlook is less than optimistic and it has a 16.5 P/E ratio, the price might stick around $68 by the end of the five years, representing a 1.2% annualized gain.
Foolish takeaway
Fairly valued right now, Fortis stock has been on the uptick despite the broader market being volatile amid the trade tensions with the US. If you want to bank on its stability and offset the effects of volatility that the rest of your portfolio might face amid market uncertainties, it can be a good investment even at its all-time highs.