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Stock Strategist

ITC's Wide Moat Intact

The utility provides returns that are well above its cost of capital.

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A wide economic moat and the Federal Energy Regulatory Commission's desire to improve the U.S. electricity transmission grid by providing incentive rates to transmission companies have produced healthy returns on capital and strong earnings growth for  ITC (ITC) since its initial public offering in 2005.

ITC's rates are based on allowed returns on equity that are relatively high compared with state-allowed returns for most other utilities. However, ITC's average allowed returns will probably decline in 2016. We believe continued low interest rates and the FERC's new methodology for calculating allowed return on equity in the June 2014 ISO New England decision increased the downward pressure on transmission investment allowed ROE. Despite this pressure on allowed returns, we still expect ITC's increasing capital expenditures to drive approximately 8% average annual earnings growth and almost 13% annual dividend increases during the next five years.

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Charles Fishman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.