2026-09-01
Business in about 100 words: Fortis owns ten regulated electric and gas utilities across five Canadian provinces, ten US states and the Cayman Islands. It makes money by investing capital into rate base, earning an allowed return on equity set by regulators, and recovering costs through customer rates. Roughly all earnings are regulated, which makes results unusually predictable. The largest pieces are ITC Holdings in US transmission, UNS Energy in Arizona, FortisBC, FortisAlberta and Central Hudson in New York. Total assets stood at CAD 78.8 billion at 30 June 2026. Growth comes from a CAD 28.8 billion five year capital plan, not from volume or pricing.
Intrinsic value, dividend discount basis: CAD 68 per share, range CAD 58 to CAD 82 Intrinsic value, MEV basis: CAD 69 per share, range CAD 63 to CAD 74 Intrinsic value, free cash flow DCF: not produced, see the note below Trailing PE on 2025 adjusted EPS of CAD 3.53: 21.7x, above the ten year norm for this business PEG: approximately 3.6x on 6% growth, which flags a full price rather than a cheap one PEGY on a 3.34% yield: approximately 2.3x, still not cheap Valuation confidence: medium to high
A note on the DCF. Fortis has structurally negative free cash flow and will for the whole of the current plan. Operating cash flow was CAD 2,232 million in the first half of 2026 against CAD 2.7 billion of capital expenditure, and the full year plan is CAD 5.6 billion. A conventional free cash flow discount model returns a negative number here, which is meaningless rather than informative. For a regulated utility in a build phase, the correct approach is to value the dividend stream and the earnings power that rate base growth produces. That is what the two figures above do. Producing a fabricated free cash flow DCF to fill the box would be false precision.
At-a-Glance Scorecard
| Item | Assessment |
|---|---|
| Business model simple and sustainable | Yes. Regulated monopoly utilities with cost recovery |
| Moat | Yes. Regulatory franchise, the most durable moat type there is |
| Management competent and shareholder aligned | Yes. 52 consecutive years of dividend increases, disciplined capital plan |
| Intrinsic value, dividend discount | CAD 58 to 82, point estimate CAD 68 |
| Intrinsic value, MEV | CAD 63 to 74, point estimate CAD 69 |
| PE / PEG | 21.7x trailing / approximately 3.6x |
| Price versus intrinsic value | Overvalued by roughly 10% against a CAD 65 to 72 core range |
| Margin of safety | None. Negative at this price |
| Free cash flow strong | No. Structurally negative and will stay so through 2030 |
| Balance sheet strong | Adequate, not strong. Debt to equity of 1.34, investment grade, heavy issuance |
| Biggest single risk | Regulatory ROE compression coinciding with higher rates and rising customer bills |
| Buy price for 9% per year over 16 years | CAD 74.93 |
| Would I still buy if the market closed for 5 years | Yes on the business, no at this price |
| Snapshot verdict | Hold |
Inputs used for the intrinsic value calculations:
- 2025 adjusted EPS: CAD 3.53 (Fortis Q4 and annual 2025 release, 12 February 2026)
- 2026 estimated adjusted EPS: CAD 3.72, my estimate from first half results and guidance, unverified
- Current annual dividend: CAD 2.56 per share, from the CAD 0.64 quarterly rate
- Adjusted dividend payout ratio: approximately 70%, per management
- Dividend growth, years one to five: 5.0%, midpoint of the 4% to 6% guidance
- Terminal dividend growth: 3.0%, defensible against long run nominal GDP for a rate regulated asset
- Discount rate: 7.25%, being a regulated utility cost of equity in Canadian dollars, above the CAPM output of roughly 5.4% at a beta of 0.44 because that output is implausibly low for a levered utility
- Fair PE for MEV: 18.5x, midpoint of a 17x to 20x range reflecting the ten year history and peer group
- Terminal PE in year 16: 18.5x
Deep Dive
Business Understanding
Fortis is close to the purest expression of the regulated utility model available on the TSX. It buys or builds poles, wires, pipes and substations, gets a regulator to approve the spending into rate base, and earns an allowed return on the equity portion of that base. Customers pay. Demand for electricity and gas distribution is inelastic and does not go away in a recession.
The model is simple and durable in a way almost nothing else is. What would kill it is not competition. It is regulation. If commissions in Arizona, New York, British Columbia or Alberta decide that allowed returns are too generous, or that customer bills have risen too far too fast, the earnings power compresses immediately and permanently. The Tucson Electric Power rate case is instructive: the company has asked for a 9.75% ROE and a 10.2% revenue increase, and it is negotiating with commission staff rather than dictating terms.
Demand is stable and, for the first time in two decades, growing. Data centre load, electrification and industrial reshoring have turned a flat volume story into a modestly growing one. Fortis flagged potential data centre investment of USD 1.5 to 2 billion at Tucson Electric Power and MISO transmission projects worth USD 3.3 to 3.8 billion at ITC.
Competitive Advantage and Positioning
There is no competitor to speak of. Nobody builds a second distribution network alongside the first. Switching costs are infinite because there is nothing to switch to. This is a moat by legal construction, and it is not eroding.
The offsetting truth is that a regulatory moat also caps returns. Fortis cannot earn 25% on capital because regulators will not allow it. The moat protects the downside and forecloses the upside. That is the trade, and it is why utilities should never be bought at growth multiples.
Positioning against peers is favourable. The diversification across ten regulatory jurisdictions in two countries reduces the risk that any single adverse ruling matters much. Emera and Hydro One are more concentrated. Algonquin has demonstrated what happens when a utility overreaches. Fortis has not overreached.
Financial Strength, Profitability
Adjusted EPS grew from CAD 3.28 in 2024 to CAD 3.53 in 2025, a 7.6% increase. Management put the three year compound growth rate for both rate base and adjusted EPS at approximately 6.5%. That is the number to anchor on, because it is realised rather than promised.
Note the gap between rate base growth of 7% and EPS growth of 6.5%. The difference is share issuance. The count has grown roughly 1.72% over the past year, largely through the dividend reinvestment plan, and every new share dilutes the per share claim on that expanding rate base. Rate base growth is not shareholder growth.
Reported return on equity is around 7.6% and return on invested capital around 3.7%. Both figures come from the US listing and are marked unverified on a Canadian dollar basis. The ROIC number looks alarming until you recognise that a utility funds most of its rate base with debt at 4% to 5%, so a low blended return on total capital is the design, not a defect. What matters is whether the allowed ROE on the equity slice is being earned, and broadly it is.
Financial Strength, Balance Sheet
This is the weak link. Debt to equity sits at roughly 1.34, and utility subsidiaries issued CAD 2.1 billion of long term debt in the first half of 2026 alone, on top of CAD 2.7 billion in 2025. Total assets of CAD 78.8 billion sit against a market capitalisation near CAD 39 billion.
None of this is unusual for the sector, and Fortis maintains investment grade ratings with nearly CAD 4 billion of credit facility capacity. But the CAD 28.8 billion capital plan is funded from operating cash, utility debt and the dividend reinvestment plan, which means the balance sheet is a permanent input to the growth story rather than a fortress behind it. In a sustained high rate environment, the refinancing cost of that stack compresses earnings directly.
There are no goodwill or pension red flags worth flagging.
Financial Strength, Cash Flow
Free cash flow is negative and will remain negative through 2030 by design. Operating cash flow of roughly CAD 2.2 billion in the first half against CAD 2.7 billion of capital spending tells the story.
This means the dividend is not funded from free cash flow. It is funded from operating cash flow, with capital spending funded by debt and new equity. That is standard utility practice, and the 70% adjusted payout ratio is genuinely conservative by sector standards and has improved over three years. But an investor should be honest about what they own: a dividend supported by a regulator’s willingness to keep approving rate base, not by surplus cash.
Share count is rising, not falling. There are no buybacks and there will not be.
Margin of Safety
There is none at CAD 76.59.
The dividend discount model at a 7.25% required return and 3% terminal growth produces roughly CAD 68. The multiples approach at 18.5 times estimated 2026 adjusted EPS of CAD 3.72 produces roughly CAD 69. The two methods land within 2% of each other, which is reassuring and means no reconciliation is needed. Both sit about 10% below the current price.
Would I still buy if my valuation were 20% to 30% too high? At CAD 76.59 the question does not arise, because the valuation would need to be too low, not too high, to justify the price.
Mispricing Thesis
Fortis is not mispriced downward. If anything it is mildly mispriced upward, and the reason is identifiable. Total shareholder return over the twelve months to 30 June 2026 was 29.3%, against a twenty year annualised figure of 10.7%. That is a rerating, not an earnings event. Adjusted EPS grew 7.6%; the share price grew far more.
What drove it: falling long rates make bond proxies more attractive, the data centre narrative has attached itself to utilities, and Fortis raised its capital plan to a record. All three are real. None of them changes the arithmetic that a utility earning a regulated return can only compound at rate base growth minus dilution, plus the dividend.
The gap closes either through time, as earnings grow into the multiple, or through a rerating downward if long rates rise. Time is the more likely mechanism and it is slow.
Management and Capital Allocation
Among the best in the sector, and this is not a throwaway line. Fortis has raised the dividend for 52 consecutive years, a record matched by almost nothing in Canada. It has kept the adjusted payout ratio near 70% while funding a record capital plan. It disposed of FortisTCI, Fortis Belize and Belize Electricity in 2025, taking CAD 63 million of losses to exit small, non core, higher risk Caribbean assets. That is the opposite of empire building. The Tilbury LNG Phase 1B approval adds roughly CAD 2 billion of regulated opportunity that is not yet in the five year plan. Management has not capitalized that into guidance, which is appropriately conservative. The one criticism: heavy reliance on the dividend reinvestment plan for equity funding transfers cost from the balance sheet to per share growth in a way that is easy to overlook. It is a quiet form of dilution.
Long-Term Outlook
Stronger in five to ten years, almost certainly. Electrification, data center load and grid hardening are structural tailwinds that did not exist a decade ago. Rate base of CAD 42.4 billion in 2025 is planned to reach CAD 57.9 billion by 2030. Disruption risk is close to zero. Distributed solar and batteries chip at the margins of volume but do not remove the need for the wires, and regulators are increasingly restructuring rates to reflect that. In a recession this holds up better than almost anything else you could own. Nobody stops paying the electricity bill.
Risk Assessment
Permanent capital loss from Fortis is hard to construct. The realistic paths:
- Regulatory ROE compression across several jurisdictions at once, driven by political pressure over customer affordability.
- A sustained rise in long term interest rates, which both raises the cost of the debt stack and derates the shares as a bond proxy.
- Foreign exchange. A large share of earnings comes from US operations, and the Q2 2026 results showed a one cent per share adverse currency effect.
- Execution failure on the capital plan, leading to disallowed costs.
None of these is likely to be catastrophic. The far more probable outcome for a buyer at CAD 76.59 is not loss but mediocrity: several years of adequate dividends and no capital appreciation while earnings catch up to the price.
Red Flag Scan
- Declining free cash flow: negative by design, not a flag in isolation, but a flag if paired with a rising payout ratio. It is not.
- Rising debt without rising earnings: debt is rising and earnings are rising alongside it. Watch the ratio, not the absolute.
- Share count rising 1.72% annually: a genuine and under discussed drag on per share compounding.
- Misaligned management pay: no evidence found. Not verified in detail.
- Serial acquisitions: no. The recent activity has been disposals.
- Accounting complexity: moderate. Adjusted versus reported EPS differed by CAD 0.13 in 2025 due to disposition losses. The adjustments are explained and reasonable.
- Moat erosion: none.
Disconfirming Evidence: The Bear Case
Short the stock and the argument runs as follows.
You are paying 21.7 times trailing adjusted earnings for a business that has compounded earnings at 6.5% over three years and guides to 4% to 6% dividend growth. The ten year average multiple for this name is closer to 19. You are therefore paying a premium of roughly 15% above normal for an asset whose growth rate is fixed by regulators and cannot surprise to the upside in any meaningful way.
The 29.3% total return over the last year is the entire problem. It was a rerating driven by falling long rates and data centre enthusiasm. Rerating cuts both ways. If Canadian long rates rise two hundred basis points, the multiple compresses toward 17 and the shares fall 20% while earnings keep growing quietly.
Meanwhile the balance sheet gets heavier every year. CAD 28.8 billion of capital spending against CAD 78.8 billion of assets, funded largely by debt and dilutive equity, in an environment where customer affordability is becoming politically live in Arizona, New York and Alberta. The regulatory compact that makes this business safe is not a contract. It is a political arrangement, and political arrangements move.
Where I land: the bear case is a valuation case, not a business case, and I accept it as such. The business is excellent and I would not short it. But the case for buying at CAD 76.59 rests on the multiple holding, and I do not think a buyer should underwrite that. This is a hold, not a buy.
Scenario Valuations
All scenarios use estimated 2026 adjusted EPS of CAD 3.72 and a 70% payout ratio, with dividends growing in line with earnings.
| Scenario | EPS growth | Terminal PE | Fair value today at a 9% required return | 16 year return at CAD 76.59 |
|---|---|---|---|---|
| Bear | 4.0% | 16x | CAD 55 | 6.4% |
| Base | 5.75% | 18.5x | CAD 75 | 8.8% |
| Bull | 7.0% | 20x | CAD 92 | 10.5% |
Bear scenario assumptions: allowed ROEs compress by 50 to 75 basis points across two or three jurisdictions, long rates rise, the multiple derates to 16x. Entry condition: this is what a buyer should expect if they pay a premium multiple at a cyclical peak in utility sentiment. Exit condition: a sustained rise in the ten year yield above 5%.
Base scenario assumptions: rate base grows 7% as guided, dilution costs roughly one percentage point, EPS grows 5.75%, the multiple settles at 18.5x. Entry condition: a price below CAD 72. Exit condition: none. Hold and collect.
Bull scenario assumptions: data centre and Tilbury opportunities land on top of the plan, EPS grows 7%, and utilities sustain a 20x multiple on structural electricity demand growth. Entry condition: any price below CAD 80 works in this world. Exit condition: a multiple above 23x.
Sensitivity of the sixteen year annualised return at CAD 76.59:
| EPS growth | Terminal PE 16x | Terminal PE 18.5x | Terminal PE 21x |
|---|---|---|---|
| 3.75% | 6.1% | 6.8% | 7.4% |
| 4.75% | 7.1% | 7.8% | 8.4% |
| 5.75% | 8.1% | 8.8% | 9.5% |
| 6.75% | 9.1% | 9.8% | 10.5% |
| 7.75% | 10.2% | 10.9% | 11.5% |
The 9% hurdle is cleared only if earnings grow faster than 6.5% or the multiple holds above 20x, and preferably both. Nine of the fifteen cells in that table fall short.
Buy Price Tables
Both tables use the base case: estimated 2026 adjusted EPS of CAD 3.72, 5.75% annual EPS growth, a 70% payout ratio, and an exit at 18.5 times terminal earnings. Unlike a pure terminal value discount, these include the dividend stream, which for a 3.34% yielder is most of the return. Every figure is an estimate sitting inside a range of roughly plus or minus 12%.
Buy price for a target annual return over sixteen years:
| Target annual return | Maximum buy price (CAD) |
|---|---|
| 5% | 121.41 |
| 6% | 107.11 |
| 7% | 94.78 |
| 8% | 84.14 |
| 9% | 74.93 |
| 10% | 66.94 |
Buy price for 9% annually over varying horizons:
| Horizon | Maximum buy price (CAD) |
|---|---|
| 5 years | 71.05 |
| 7 years | 71.86 |
| 10 years | 72.98 |
| 12 years | 73.67 |
| 14 years | 74.32 |
| 16 years | 74.93 |
Projected exit value in the sixteen year case: EPS of CAD 9.10 at 18.5 times, or CAD 168 per share, plus roughly CAD 72 of cumulative dividends along the way.
At CAD 76.59 the stock sits about 2% above the sixteen year 9% threshold of CAD 74.93 and roughly 8% above the shorter horizon thresholds. It misses the hurdle, but not by much.
Sell Discipline
Thesis triggers:
- A cut, freeze or below guidance increase to the dividend. After 52 years, a break in the streak would signal that management sees something the market does not.
- The adjusted payout ratio rising back above 80%, indicating earnings are no longer keeping pace with the distribution.
- Adverse ROE decisions in two or more of Arizona, New York, British Columbia or Alberta within the same cycle, which would mark a shift in the regulatory compact rather than a local outcome.
- Share count growth accelerating above 3% annually, which would mean the capital plan is outrunning the balance sheet’s capacity to fund it.
- A large, out of footprint acquisition. Fortis has earned trust by not doing this. Doing it would forfeit that trust.
Valuation trigger:
- A move above roughly CAD 90, being 24 times estimated 2026 adjusted earnings, would put the forward sixteen year return below 7% on base assumptions. That is a trimming level, and it matters because a utility priced for 7% is a bond substitute with equity risk attached.
Risk Profile
| Sub-factor | Weight | Score (1-10) | Note |
|---|---|---|---|
| Financial Stability | 0.30 | 6 | Investment grade and diversified, but debt to equity of 1.34 and permanently negative free cash flow |
| Earnings Volatility | 0.20 | 9 | Regulated returns produce among the most predictable earnings on the TSX |
| Business Model Risk | 0.20 | 9 | Legal monopoly with cost recovery. Close to the lowest business risk available |
| Macro Sensitivity | 0.15 | 5 | Acts as a bond proxy. Rate sensitive on both the multiple and the cost of debt |
| Market Risk | 0.15 | 8 | Beta of 0.44. Holds up in drawdowns |
Risk Score: 7.35 out of 10. This is a low risk security. The score is held back by financial stability and macro sensitivity, which is the correct reading: the business is safe, the balance sheet is leveraged, and the share price moves with long rates.
Opportunity Profile
| Sub-factor | Weight | Score (1-10) | Note |
|---|---|---|---|
| Growth Potential | 0.30 | 6 | 7% rate base growth converting to roughly 6% EPS growth. Visible and reliable, but capped |
| Unit Economics | 0.20 | 6 | Allowed ROE near 9.5% to 10% on the equity slice. Dependable, not exciting |
| Competitive Advantage | 0.20 | 9 | Regulatory franchise. The most durable moat category available |
| Valuation Asymmetry | 0.20 | 3 | Trading roughly 10% above intrinsic value. The asymmetry runs the wrong way |
| Catalysts | 0.10 | 6 | Data centre load, Tilbury LNG Phase 1B, MISO transmission, all beyond the current plan |
Opportunity Score: 6.00 out of 10. Moderate. Competitive advantage and growth potential carry the score, and valuation asymmetry drags it down. At CAD 65 the same business scores roughly 6.8, which is the entire point.
Classification
Growing, slowly and predictably. Rate base compounds at 7% and earnings at roughly 6%.
Peter Lynch would call this a textbook stalwart. Reliable, boring, dividend paying, unlikely to double quickly and unlikely to halve. Lynch’s rule for stalwarts was to buy them when they were out of favour and trim when the PE ran ahead of the growth rate. On that test, a PEG near 3.6 says this one has run ahead.
Charlie Munger would call it a great business at a full price, which by his framing is not the same as a great investment. Munger’s preference was a wonderful business at a fair price, and CAD 76.59 against a CAD 65 to 72 fair range is not a fair price. He would be entirely comfortable owning it and entirely unwilling to add today.
Data Used Versus Ignored
Relied upon:
- 2025 adjusted EPS of CAD 3.53 and 2024 of CAD 3.28, from the Fortis Q4 and annual 2025 release dated 12 February 2026.
- Q2 2026 EPS of CAD 0.78 and first half EPS of CAD 1.76, from the Q2 2026 release dated 31 July 2026.
- The CAD 28.8 billion 2026 to 2030 capital plan and rate base growth from CAD 42.4 billion to CAD 57.9 billion, same source.
- Dividend of CAD 0.64 per quarter, up 4.1%, and the 52 year increase streak, from the Q2 2026 MD&A.
- Total assets of CAD 78.8 billion at 30 June 2026 and first half operating cash flow of CAD 2,232 million, same source.
- Total shareholder returns of 29.3% over one year, 12.4% over five, 10.5% over ten and 10.7% over twenty, per Bloomberg as at 30 June 2026 via the MD&A.
- Three year rate base and adjusted EPS growth of approximately 6.5% and an adjusted payout ratio near 70%, from management’s Q4 2025 commentary.
Set aside:
- Analyst price targets. The consensus figure available was for the US listing in US dollars and does not translate cleanly.
- Reported EPS in isolation. The 2025 disposition losses of CAD 63 million distort it, and the adjustments are legitimate.
- Free cash flow. Negative by design for a utility in a build phase, so it carries no valuation signal here.
Marked unverified:
- Estimated 2026 adjusted EPS of CAD 3.72. This is my figure derived from first half results and guidance, not a company forecast. A CAD 3.60 outcome lowers the sixteen year 9% buy price to roughly CAD 72.50; a CAD 3.85 outcome raises it to roughly CAD 77.50.
- Return on equity of 7.58% and return on invested capital of 3.72%, sourced from the US listing and not confirmed on a Canadian dollar basis.
- Management compensation structure, not examined in detail.
Confidence is medium to high rather than high because the earnings estimate is mine and the terminal multiple assumption carries most of the valuation weight.
Summary and Verdict
Fortis is one of the highest quality businesses on the Toronto exchange. Ten regulated utilities, a legal monopoly in each, 52 consecutive years of dividend increases, a record capital plan with 7% rate base growth funded and approved, and earnings that will not fall in a recession. Almost nothing about the business is in question.
The price is. At CAD 76.59 the shares trade at 21.7 times 2025 adjusted earnings against a business growing earnings near 6% and guiding dividends to 4% to 6%. Two independent methods, a dividend discount model and a multiples approach, converge on a fair value near CAD 68 to CAD 69. The last twelve months produced a 29.3% total return against 7.6% earnings growth, which is a rerating rather than an improvement in the underlying economics.
Verdict: hold.
Target price range: fair value CAD 65 to CAD 72. Accumulation range below CAD 72, with a genuine margin of safety below CAD 66. Trimming range above CAD 90, where the forward return falls below 7%.
Does it meet the 9% over 16 years goal at CAD 76.59? Not quite. The base case delivers roughly 8.8% annualised, and the calculated 9% buy price is CAD 74.93. It misses by about 2%, which is close enough that a modest pullback or a slightly better than expected earnings year would close the gap. But it does not clear the bar today, and over shorter horizons the required price drops to around CAD 71 to 73.
Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Always perform your own due diligence or consult with a financial advisor before making investment decisions.
