Rising interest rates have pummelled plenty of dividend stocks, and Emera Inc. is no exception.
Since hitting a record high of more than $37 in April, shares of the Halifax-based electricity producer and distributor have plunged 20 per cent. They closed Tuesday at $29.84 on the Toronto Stock Exchange.
So is it time to pull the plug on Emera? I don’t think so. If anything, the recent selloff has created an attractive entry point for a stock that provides a nice combination of safety, growth and rising dividends. That’s why I haven’t sold any of my Emera shares and would consider adding to my position.
Analysts also continue to like the stock. Of the 13 who follow the company, five rate it a “buy,” with seven “holds” and just one “sell.”
“In our view, Emera is an ideal choice for conservative income investors,” Odlum Brown analyst Cory O’Krainetz said in a recent note. “The dividend yield is higher than other regulated utilities, such as Fortis and Canadian Utilities, and we expect the dividend to be increased in step with earnings over time.”
Even with the recent drop in the shares, long-term investors in Emera have done well. For the 10 years ended Sept. 30, the stock delivered a total return, including reinvested dividends, of 10.7 per cent annually. That compares with a total return of 8.3 per cent for the S&P/TSX Composite Index.
What’s more, Emera – the parent of Nova Scotia Power – has raised its payment to shareholders 10 times in that period, at an annual rate of about 5 per cent. The shares now yield about 4.7 per cent, up from about 3.8 per cent before the stock fell out of bed.
There are no guarantees Emera will continue to post such solid long-term returns, of course, particularly if bond yields rise sharply. However, Emera’s regulated operations are insulated to an extent from rising interest rates, and the company has several sources of growth that are expected to drive earnings higher.
Currently, more than 80 per cent of Emera’s earnings are from low-risk regulated investments, which include electric utilities in Nova Scotia, Maine and the Caribbean. These businesses throw off steady cash flow and, thanks to their regulated returns, benefit from “favourable pass-through mechanisms that mitigate or eliminate the long-term earnings impact from changes in interest rates, commodity prices, volume fluctuations, weather conditions, inflation and taxes,” Jeremy Rosenfield, an analyst at Desjardins Capital Markets, said in a note.
Rising interest rates could still pinch the stock, however, because regulated returns aren’t adjusted immediately when rates fluctuate. Also, because of their steady cash flows, utility stocks trade much like bonds, which fall when interest rates rise.
Still, Mr. Rosenfield sees “significant longer-term upside” from about $5-billion of growth projects, the largest of which is Emera’s roughly $2-billion total investment in the proposed Maritime Link, which will transmit power from Newfoundland to Nova Scotia via undersea cables, and an associated link from Muskrat Falls, Labrador, to the island of Newfoundland.
Growth will also come from investments in wind power, capital spending on regulated utilities and from Emera’s 25-per-cent stake in Algonquin Power & Utilities, he said. In addition, Emera in late August agreed to purchase three gas-fired electricity generating facilities, in Connecticut, Rhode Island and Maine, from Capital Power Corp. for $541-million.
Although Mr. Rosenfield rates the stock a “hold,” reflecting “significant near-term financing requirements,” he expects that Emera will increase earnings per share by 4 per cent to 6 per cent annually, with similar growth in the dividend.