John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
I love dividend increases for a couple of reasons.
First, a dividend increase puts more money in my pocket.
Second, a dividend hike sends a strong signal of confidence. Most companies (resource producers being an exception) don't generally increase their dividends unless they're certain the payment can be sustained.
So a dividend increase is valuable, not just for the extra cash it provides, but for the information it imparts about the future. That's one of the reasons I'm such a big fan of companies that raise their dividends regularly: by shelling out growing amounts of cash, they are constantly reminding investors that the outlook for their business is positive.
Which brings us to Halifax-based Emera Inc.
In the past year, the parent of Nova Scotia Power has raised its dividend not once, not twice, but three times. The most recent increase, announced in early August, was an unusually large 19 per cent, boosting Emera's annual dividend to $1.90 from $1.60. The stock – which I own personally – now yields an attractive 4.28 per cent.
There's more. Further underlining the company's bullish outlook, Emera raised its annual dividend growth target to 8 per cent for 2016 through 2019, up from 6 per cent previously.
Clearly, Emera is feeling very confident about its businesses, which include extensive electricity generation, transmission and distribution assets in Atlantic Canada, the U.S. Northeast and the Caribbean. Analysts are also increasingly bullish on the stock, judging by a flurry of recent price target increases.
"With the big dividend increase and higher dividend growth guidance, Emera has become a legitimate alternative to the oil and gas-related infrastructure stocks," RBC Dominion Securities analyst Robert Kwan said in a note in which he reiterated an "outperform" rating on the shares and raised his price target to $53 from $50. "We believe Emera stands out as a regulated utility alternative," Mr. Kwan said.
For dividend-oriented investors, Emera offers a nice combination of safety and growth. With about 80 per cent of 2015 earnings expected to come from regulated or long-term contracted assets, the company's performance is relatively stable and predictable. The dividend is also safe, with a payout ratio of about 75 per cent of adjusted earnings.
On the growth side, several factors are working in Emera's favour.
The first is the massive Lower Churchill hydro project, which is on track for completion in 2017. One leg of the project will transmit power from Labrador to Newfoundland via the $2.79-billion Labrador Island Link, in which Emera will hold a minority stake. The other leg will transmit power from Newfoundland to Nova Scotia via the $1.58-billion Maritime Link, in which Emera will hold a 100-per-cent stake.
"Emera is expected to realize a material increase in cash flow from these projects once they are placed into service," Mr. Kwan said. The "enhanced visibility" of earnings from the Maritime Link and Labrador Island Link was likely a factor in the board's decision to raise the dividend significantly, he said.
A second key driver of Emera's growth are its generating plants in New England. Specifically, these plants are benefiting from rising capacity payments – essentially cash paid to electricity generators to guarantee that they have the capacity to meet power demand at all times.
Annual revenue from capacity payments is expected to rise to about $145-million (U.S.) by 2018-19, up from about $40-million currently, CIBC World Markets analyst Paul Lechem said in a note. "This increase in capacity revenues is effectively pure margin – there are no increases in capex and/or operating costs required to achieve this," he said.
Depending on foreign exchange and tax rates, the Lower Churchill transmission projects and rising capacity revenues together are expected to add more than $150-million (Canadian) of net income by 2019, Mr. Lechem said, driving roughly an 8-per-cent annual increase in earnings per share over that time. This is a conservative estimate, because it excludes other growth projects at Emera's utilities in Nova Scotia, Maine and the Caribbean.
Emera's stock isn't cheap. Its price-to-earnings multiple of more than 18 times estimated 2016 earnings is a couple of points higher than the utility group average. "However, we believe the company's highly regulated business and dividend growth outlook (supported by underlying earnings and cash flow growth) support a premium valuation," Mr. Lechem said.
Also, keep in mind that utilities stocks can be vulnerable to rising interest rates. And, as we've seen recently, even solid companies such as Emera can get caught in the downdraft when the market plunges.
But while short-term stock moves are impossible to predict, for long-term investors Emera will almost certainly continue to deliver dividend increases for many years to come.