Growing utility’s new target cuts risk

This diversified Canadian utility plans to raise its annual dividend rate between 4% and 5% each year through 2021. That’s down from its previous 8% target, but this more modest growth conserves cash for new projects and pays down debt.

That’s why this company has our highest possible dividend sustainability rating and remains a top pick for any serious dividend investor. Stronger profitability, combined with rising dividends, is a winning formula.

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EMERA INC. $44 (Toronto symbol EMA; Income-Growth Payer Portfolio, Utilities sector; Shares outstanding: 232.9 million; Market cap: $10.2 billion; Dividend yield: 5.3%; Dividend Sustainability Rating: Highest; owns 100% of Nova Scotia Power, that province’s main electricity supplier. It contributes 20% of Emera’s earnings.

  • Emera took its current form in July 1998 as a holding company for Nova Scotia Power
  • Over 90% of its earnings come from regulated operations
  • Aims to pay out 70% to 75% of its adjusted net income as dividends

The remaining 80% of earnings come from the company’s investments in several power plants and gas pipelines in the U.S. and the Caribbean. Those include its July 2016 purchase of TECO Energy for $13.9 billion. That firm supplies electricity and natural gas in Tampa Bay, Florida, and New Mexico.

Starting with the November 2018 payment, Emera raised its quarterly dividend by 4.0%, to $0.5875 a share from $0.565. The new annual rate of $2.35 yields a high 5.3%.

The company’s revenue rose 33.3%, from $2.2 billion in 2013 to $3.0 billion in 2014. That’s due to its acquisition of New England Gas Generating Facilities. Lower revenue from its energy trading operations cut its 2015 revenue by 5.1% to $2.8 billion. In 2016, revenue jumped 53.4% to $4.3 billion as a result of the TECO Energy purchase. In 2017, revenue increased 47.3% to $6.2 billion on the full-year contribution from TECO.

Earnings rose 23.1%, from $259.4 million in 2013 to $319.2 million in 2014. Due to more shares outstanding, earnings per share increased by 13.8%, from $1.96 to $2.23. Emera’s net income increased by 3.5% in 2015 to $330 million, or $2.26 a share. However, earnings in 2016 jumped 43.9% to $475.0 million, or $2.77 a share, following the TECO purchase. Overall earnings gained 10.3% in 2017, to $524 million. Emera sold shares to pay for TECO, so earnings per share declined 11.2% to $2.46.

In the third quarter of 2018, Emera’s revenues rose 4.8%, to $1.50 billion from $1.43 billion a year earlier. Earnings soared 61.9%, to $191 million from $118 million a year earlier. Due to more shares outstanding, earnings per share rose 49.1%, to $0.82 from $0.55. The gains are partly due to a $23 million tax benefit for Emera’s Florida operations.

In the past 12 months, the company has spent $2 billion on new projects. Those include its 49.5%-owned Labrador Island Link, which transmits power from a new hydroelectric facility at Muskrat Falls, Labrador, to the island of Newfoundland. Nalcor (Newfoundland’s government-owned power company) owns the other 50.5%.

Dividend Stocks: Predictable cash flows mean safe dividends and secure growth

Emera has also completed its 100%-owned Maritime Link undersea cable, which transmits electricity from the island of Newfoundland to Nova Scotia. That project cost $1.6 billion.

The company borrowed most of the funds it needed for those projects. As a result, its long-term debt was $13.6 billion as of September 30, 2018, or a high 1.33 times its market cap. However, Emera gets 90% of its earnings from regulated utilities. Predictable cash flows from those businesses help pay down the company’s loans.

The company is also selling some of its non-core assets. In November 2018, it agreed to sell three natural-gas-fired power plants in New England for a total of $590 million U.S.

Its projected earnings will probably rise from $2.79 a share in 2018 to $2.89 in 2019. The stock trades at 15.2 times the 2019 estimate.

Recommendation in The Successful Investor: Emera is a top pick of 2019.


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