I have some cash to invest and I’ve been looking at Emera Inc. for its attractive yield. What is your opinion?
I’ve owned Emera (EMA) for many years and it’s been a steady performer. For the 10 years through Sept. 30, the stock posted a total return, including dividends, of 10.7 per cent on an annualized basis. That’s nearly two percentage points better than the S&P/TSX Composite Index’s total return of 8.8 per cent over the same period.
I also hold Emera in my model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio). I consider it a long-term hold for investors seeking income and modest growth. Here’s why.
It’s relatively conservative
As a utility operator, Emera is on the conservative end of the risk spectrum. Its 2.5 million customers in Atlantic Canada, Florida, New Mexico and the Caribbean depend on a reliable flow of electricity and natural gas to keep their lights on and heat their homes and businesses. What’s more, about 95 per cent of Emera’s earnings are regulated by public utility commissions, which contributes to the stability of its cash flows. Utilities aren’t going to give you a lot of excitement, but because they provide an essential service and earn regulated returns, they are unlikely to give you any nasty surprises.
Its dividend is growing
On Sept. 24, Emera hiked its dividend by 3.9 per cent, to $2.65 on an annual basis from $2.55, marking the 15th consecutive year the company has raised its payout. The streak isn’t about to end now: In announcing its latest increase, Emera extended its guidance for annual dividend growth of about 4 to 5 per cent through 2024, beyond 2022 previously, citing investments in the transition to lower-carbon energy that will support growing cash flow and earnings per share. For example, at its Nova Scotia Power and Tampa Electric subsidiaries, Emera aims to increase the proportion of electricity generated from renewable sources to 29 per cent by 2025, up from 13 per cent currently, while cutting coal to 10 per cent of generation from 19 per cent.
A nice yield – that will only get nicer
Based on Emera’s closing price of $58.67 on Friday, the shares yield 4.5 per cent. That’s attractive by itself, but it’s even more appealing given the company’s goal to continue increasing its payout. Dividend increases aren’t official until they are declared by the board, but analysts say Emera can achieve its dividend growth objectives while also gradually lowering its payout ratio – estimated at about 90 per cent for 2021 – to its target range of 70 to 75 per cent.
Plenty of growth ahead
Emera has $7.4-billion of capital spending planned for 2021 through 2023, with an additional $1.2-billion of potential opportunities. Projects include grid modernization and infrastructure upgrades, solar power investments at Tampa Electric, “storm-hardening” measures to protect against extreme weather events in Florida and transmission investments in the Labrador Island Link that carries electricity from Muskrat Falls to the island of Newfoundland. These and other projects are expected to drive annual growth of 7.5 to 8.5 per cent in Emera’s rate base – the value of assets on which a utility is permitted to earn a regulated rate of return – through 2023, which, in turn, will support growing earnings and dividends.
Analysts are bullish – mostly
Of the 16 analysts who follow the company, there are seven buy recommendations, eight holds and one sell. The average 12-month price target is $61.22. Darryl McCoubrey of Veritas Investment Research – the sole analyst with a sell rating – said his main concern is that Emera’s investment-grade credit rating could be at risk if the company fails to improve its debt ratios. However, he said the company has made some progress on that front, and the credit rating agencies – all of which have Emera at the low end of investment grade with a “stable” rating – appear willing to give the company some breathing room. As for Emera’s dividend, “it’s completely safe. I want to make that perfectly clear,” Mr. McCoubrey said in an interview.
Closing thoughts
Utilities aren’t risk-free. For example, a sudden jump in interest rates or unfavourable regulatory decisions could weigh on their shares. However, over the long term, Emera’s earnings and dividends will almost certainly continue to grow, thanks in part to a strong tailwind from the shift to renewable energy. For all of these reasons, I believe the stock deserves a place in a well-balanced portfolio.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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