Gordon Pape is a well known investing and personal finance guru and author, 2009Tory Zimmerman/The Globe and Mail
These are not easy times for income investors. As of the close of trading on Oct. 9, all but one of the dividend-related TSX sub-indexes were in negative territory for the year. That includes REITs, utilities, preferred shares, financials, and the dividend composite index. The only exception was telecom services, which was up 5 per cent for 2015.
The drop in value of some of the most widely held dividend stocks has left people perplexed and frustrated. Except for the energy sector, most companies have either held the line on their payouts or even increased them. But the decline in share price has dented portfolio values, causing stomachs to churn when monthly brokerage statements are opened.
Take a deep breath and relax. Outside of the resource sector, reset preferreds, and a few isolated situations, dividends look safe. Your cash flow will remain intact and the damage to your portfolio will eventually be corrected.
That said, it's nice to find a stock that is paying a decent return and has pretty much held its value through the market turmoil. In fact, it is actually trading above its 50-day and 200-day moving averages. The company is Emera Inc., an electricity and gas distribution firm based in Halifax. Here's what you need to know about it. Figures are as of the close on Oct. 9.
Emera Inc. (EMA-T)
Type: Common stock
Trading symbols: EMA, EMRAF
Exchange: TSX
Current price: $43.69
Entry level: Current price
Annual payout: $1.90
Yield: 4.3 per cent
Risk Rating: Conservative
Recommended by: Gordon Pape
Website: www.emera.com
The business: Emera is a geographically diverse energy and services company headquartered in Halifax, Nova Scotia with approximately $10-billion in assets and 2014 revenues of just under $3-billion. The company invests in electricity generation, transmission, and distribution, as well as gas transmission and utility energy services. The company's strategy is focused on the transformation of the electricity industry to cleaner generation and the delivery of that clean energy to market. Emera has investments throughout north-eastern North America, and in four Caribbean countries. Between 75 per cent and 85 per cent of its adjusted earnings come from rate-regulated businesses, which provides stability but limits growth potential.
Why I like it: Three words: stability and income. As a regulated utility, Emera can rely on steady cash flow while largely avoiding cyclical volatility. The company has a long history of annual dividend increases and has set a target dividend growth rate of 8 per cent a year through 2019. It is exceeding that target by a wide margin this year, with the announcement of a 19 per cent increase to $0.475 per quarter ($1.90 a year), effective with the Oct. 29 payment.
But the story doesn't end there. The company is expanding through acquisition, adding to its cash flow potential in the process. Last month it announced a $10.4-billion (U.S.) acquisition of Tampa-based TECO Energy, an electricity and gas distributor with operations in Florida and New Mexico. The deal, which is subject to various approvals, is expected to close in mid-2016. When it does, Emera's total assets will increase to approximately $20-billion, with 56 per cent of those assets in Florida, 23 per cent in Canada, 10 per cent in New England, 6 per cent in New Mexico, and 5 per cent in the Caribbean.
Emera CEO Chris Huskilson said the deal will be "significantly accretive" to shareholders and will position the company to extend the 8 per cent annual dividend growth target to beyond 2019.
The deal is being financed in part by a $2.185-billion issue of convertible debentures, which was completed earlier this month.
Financial highlights: Second-quarter results were respectable, which is about the best you can hope for from a utility. Adjusted earnings per share came in at 33 cents, a modest improvement from 31 cents the year before. For the first half of fiscal 2015, adjusted earnings per share were $1.51, up from $1.34 in 2014.
Operating revenue for the quarter was down 5.2 per cent to $527-million, primarily due to mark-to-market changes and reduced revenue at the New England gas generating facilities and Emera's Barbados operation.
Risks: Emera is subject to the usual risks associated with electrical and gas utilities. These may include reduced generating output due to natural conditions or labour disputes, lower weather-related demand, etc.
On a macro level, dividend stocks tend to come under pressure when interest rates rise, although the company's aggressive target for annual increases may offset that.
The company has a good credit rating of BBB+ from Standard & Poor's.
Distribution policy: Payments are made quarterly in January, April, July, and October. The company offers an excellent dividend reinvestment plan that allows investors to buy shares from the Treasury at a 5-per-cent discount to the market price.
Tax implications: Quarterly payments are eligible for the dividend tax credit if received by Canadian investors in non-registered accounts.
Who it's for: Emera is suitable for investors who are looking for a low-risk security that offers a respectable yield and the prospects of steady dividend increases for the next several years.
How to buy: The shares trade actively on the TSX and any broker can fill your order.
Summing up: This is an ideal stock for a conservative income portfolio. If you don't already have a position, consider taking one now. Talk to your financial adviser.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape