emera

EMERA INC. $31 (Toronto symbol EMA; Income Portfolio, Utilities sector; Shares outstanding: 114.0 million; Market cap: $3.5 billion; Price-to-sales ratio: 2.3; Dividend yield: 4.2%; TSINetwork Rating: Average; www.emera.com) gets 70% of its revenue from Nova Scotia Power Inc., which is Nova Scotia’s main electrical-power supplier. The rest comes from its investments in pipelines and power companies in the U.S. and Caribbean. Emera is expanding into other businesses and countries. For example, it recently paid $85 million U.S. for 38% of Barbados Light & Power Co. Ltd. As well, its $350-million Brunswick Pipeline, which pumps natural gas from Saint John, New Brunswick, to the U.S. border, began operating on July 16, 2009. Thanks to these new operations and a lower tax bill, Emera’s earnings rose 20.1%, to $44.8 million from $37.3 million a year earlier. Earnings per share rose 18.2%, to $0.39 from $0.33, on more shares outstanding. Revenue rose 10.1%, to $373.5 million from $339.1 million....

In light of today’s low interest rates, we continue to recommend that income-seeking investors buy high-quality utility stocks instead of bonds. These five utilities’ dividend yields have come down lately, but that’s because their stock prices are rising, not because they are cutting their payouts. In fact, all five have been raising their dividends, and their steady cash flows will let them continue to do so. FORTIS INC. $32 (Toronto symbol FTS; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 173.7 million; Market cap: $5.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.5%; TSINetwork Rating: Above Average; www.fortis.ca) is the main supplier of electrical power in Newfoundland and Prince Edward Island. It also operates power plants in other parts of Canada, as well as the U.S., Belize and the Cayman Islands. Fortis’ other businesses include Terasen Inc., which distributes natural gas in B.C., and hotels in Atlantic Canada....

BOMBARDIER INC. (Toronto symbols BBD.A $5.16 and BBD.B $5.18; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $8.8 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.9%; SI Rating: Extra Risk) will launch a new, bigger version of its Global Express business jet in October 2010. This new plane will help it compete with rival Gulfstream, which has released a business jet that is 20% larger than Bombardier’s current model. The company will probably build a stretched version of its current plane, instead of designing a whole new model. That will keep its development costs down. Bombardier is a buy. The subordinate-voting “B” shares are the better choice, because of their slightly better liquidity and higher dividend yield....

BCE INC., $32.99, Toronto symbol BCE, is buying full control of CTVglobemedia, the private company that owns the CTV Television Network, which consists of 27 TV stations. CTVglobemedia also owns 30 speciality channels, 34 radio stations and The Globe and Mail newspaper. BCE has controlled the CTV television network before: in 2000, the company bought a majority interest in CTV as part of a “convergence” strategy to combine media content with its satellite TV, Internet and phone networks. The plan did not work out as well as BCE had hoped. So, in 2005, BCE sold most of its CTV stake to Woodbridge Co., the Ontario Teachers’ Pension Plan and Torstar Corp. (see below). Right now, BCE owns 15% of CTVglobemedia. It will pay $1.3 billion for the remaining 85%. The company will also assume $1.7 billion of CTVglobemedia’s debt. Following the purchase, BCE will sell 85% of The Globe and Mail to Woodbridge. These deals still need regulatory approval, but BCE expects to complete them in mid-2011....

The federal government plans to phase out coal-fired power plants by around 2025. Under the proposals, utilities would have to close their coal-fired plants when they reach 45 years of age, or when their power-purchase contracts with provincial electricity regulators expire, whichever is later. Coal-plant operators may extend the lives of these plants if they can lower their carbon emissions to the same level as natural-gas-fired plants. The plan is still in its early stages, and much could change before it comes into effect in 2011. The new rules will hurt some power producers more than others. But these four utilities should be able to pass most of the extra costs on to their customers. CANADIAN UTILITIES LTD. (Toronto symbols CU (class A non-voting) $47 and CU.X (class B voting) $47; Income Portfolio, Utilities sector; Shares outstanding: 125.8 million; Market cap: $5.9 billion; Price-to-sales ratio: 2.2; Dividend yield: 3.2%; SI Rating: Above Average) distributes electricity and natural gas in Alberta. It also operates 20 power plants: 15 in Canada; three in Australia and two in the U.K. As well, the company sells its engineering services to other firms. ATCO Ltd. (also in this issue) owns 52.2% of Canadian Utilities....

ALGONQUIN POWER & UTILITIES CORP. $4.10 (Toronto symbol AQN; Shares outstanding: 93.9 million; Market cap: $385.1 million; SI Rating: Extra Risk; Dividend yield: 5.9%) converted to a dividend-paying corporation in October 2009. Prior to its conversion, it was called Algonquin Power Income Fund. Algonquin holds interests in 45 renewable-power facilities in Canada and the northeastern U.S., as well as 14 thermal-energy plants and 19 water-distribution and waste-water facilities. These assets include facilities it owns through a partnership with Emera Inc. (Toronto symbol EMA). Emera is a recommendation of The Successful Investor, our affiliated publication. Emera holds 9.9% of Algonquin. The company has started building its 26.4-megawatt Red Lily wind farm in Saskatchewan. Algonquin expects the $67.7-million project to start generating power in early 2011. The company has already signed an agreement with SaskPower, the province’s main electricity supplier, to buy all of Red Lily’s power for 25 years....

PLEASE NOTE: Our next Hotline will go out on Friday, July 9, 2010. GENNUM CORP., $6.60, Toronto symbol GND, earned $4.1 million, or $0.12 a share (all amounts except share price in U.S. dollars) in the three months ended May 31, 2010. That’s a big improvement over the $1.1 million, or $0.03 a share, it lost a year earlier. Gennum makes chips and other electronic equipment that lets television broadcasters store, edit and transfer video signals without losing picture quality. It also makes chips that improve the flow of data inside computer networks....

CGI GROUP INC., $14.90, Toronto symbol GIB.A, has agreed to buy Stanley Inc. (New York symbol SXE). Founded in 1966 by U.S. Navy Rear Admiral Emory Stanley, Stanley Inc. provides computer-outsourcing services, mainly to military and civilian agencies of the U.S. government. CGI aims to close the deal later this year. CGI is paying roughly $1.07 billion U.S. for Stanley. That’s equal to 26% of CGI’s $4.3-billion (Canadian) market cap. On March 31, 2010, CGI held cash of $419.1 million, or $1.47 a share, so it will need additional funds to complete this purchase. However, its long-term debt of $274.5 million is a low 6% of its market cap, so it can comfortably afford to borrow most of the price. Adding Stanley will diversify CGI’s U.S. operations. Following the purchase, defense and intelligence customers will represent 55% of its customer base, while the remaining 45% will come from civilian customers. CGI will also gain access to Stanley’s high-quality clientele, which should give it high-potential cross-selling opportunities....

EMERA INC. $24 (Toronto symbol EMA; Income Portfolio, Utilities sector; Shares outstanding: 113.0 million; Market cap: $2.7 billion; Price-to-sales ratio: 1.8; Dividend yield: 4.7%; SI Rating: Average) owns Nova Scotia Power Inc., which is Nova Scotia’s main electrical-power supplier. Nova Scotia Power supplies 94% of Emera’s revenue. The remaining 6% comes from investments in power companies in the U.S. and Caribbean. Emera is diversifying into other businesses. For example, its Brunswick Pipeline, which carries natural gas from Saint John, New Brunswick, to the U.S. border, began operating on July 16, 2009. The pipeline contributed $14.0 million to Emera’s 2009 earnings. That’s the main reason why its 2009 earnings rose 21.9%, to $175.7 million from $144.1 million in 2008. Emera also benefited from higher power rates in Nova Scotia. Earnings per share rose 20.6%, to $1.52 from $1.26, on more shares outstanding. Revenue rose 10.0%, to $1.5 billion from $1.3 billion....

Utility stocks have more appeal than they used to, mainly because low interest rates have made bonds less appealing. (See later in this issue for our full analysis of why utilities are a better choice than bonds for your portfolio.) We see all five of these electrical-power utilities as buys. That’s because they offer an attractive mix of safety, income and growth. As well, they have maintained or raised their dividends, despite the recession and stock-market downturn. CANADIAN UTILITIES LTD. (Toronto symbols CU (class A non-voting) $47 and CU.X (class B voting) $47; Income Portfolio, Utilities sector; Shares outstanding: 125.9 million; Market cap: $5.9 billion; Price-to-sales ratio: 2.2; Dividend yield: 3.2%; SI Rating: Above Average) distributes electricity and natural gas in Alberta. It also operates 19 power plants: 15 in Canada, two in the U.K., and two in Australia, As well, Canadian Utilities sells engineering services to other utilities. ATCO Ltd. (see right) owns 52.3% of the company....