A surprise dividend hike and growing cash pile, alongside both a falling loonie and interest rates, have sent shares of energy and utilities company Emera Inc. to new heights recently. However, some analysts and portfolio managers expect the stock to now take a breather after its dramatic run in recent months.
Shares of Halifax-based Emera, the company behind Nova Scotia Power, Bangor Hydro and a handful of other energy generation and transmission investments across northeastern North America and the Caribbean, hit a record high last week amid a round of analyst target price increases. The stock is now up by about 10 per cent so far this year, and has increased by more than 30 per cent over the past 12 months.
The renewed investor confidence comes after Emera recently unveiled an unexpected annual dividend increase of 3.2 per cent, which followed a 6.9-per-cent increase announced in September, signalling its confidence in future earnings growth.
The "double-digit dividend delight," alongside a fourth-quarter earnings beat, led Credit Suisse analyst Andrew Kuske to raise his target on the stock to $46, from $44, and stick with his "outperform" rating (which is similar to "buy").
BMO Nesbitt Burns analyst Ben Pham increased his target to $42.50 from $41, but stuck to his "market perform" rating, (similar to "hold"), saying low bond yields have driven valuations higher.
"Emera's below-average business risk profile, attractive dividend growth, and strong management should support current share prices," Mr. Pham said in a note.
Investments in high-yield, capital-intensive sectors often do better when bond yields and interest rates are lower because such an environment lessens borrowing costs. Investors also tend gravitate toward higher-yield stocks when interest rates are falling. Emera's dividend currently yields about 3.8 per cent.
Mr. Pham is one of five analysts with a "hold" or equivalent rating on the stock, while four say "buy," and one "sell," according to Thomson Reuters. The analyst consensus price target over the next year is around $43, which is near its record high of $43.62, reached Feb. 11.
Michael Sprung, president of Sprung Investment Management, said the stock has a good growth profile but is expensive, trading at about 20 times forward earnings. "It's fairly priced, but it's not a bargain," he said.
TD Securities analyst Linda Ezergailis said in a note that the company's growing dividend should appeal to income-oriented investors, "in addition to what we view as Emera's attractive long-term growth outlook and low-risk business model."
She recently increased her target by $1 to $44 but maintained her "hold" on the stock.
Ms. Ezergailis also cites some risks for the company such as higher bond yields, higher fuel prices and higher construction costs, none of which are on the horizon. The company could also be hurt by acquisitions that don't create shareholder value.
So far the company is benefiting from its 2013 acquisition of gas-fired electricity generating facilities in New England, expanding its footprint in the northeastern United States.
Late last year, the company sold its interest in Northeast Wind Partners II LLC, which has wind generating assets in the same region.
Emera chief executive Chris Huskilson said the company saw a chance to make a profit off of the asset, which was its worst performer, and focus on ones that help generate higher cash flow.
"We have a visible growth plan," said Mr. Huskilson, pointing to the company's plan to grow its dividend by 6 per cent a year for the next five years, a target which it's so far surpassing. "I certainly wouldn't rule out exceeding it in future years."
He said the company's price-earnings valuation is roughly in line with its average over the past decade.
"We're pretty competitively priced … and in that 10 years interest rates have gone up and down. I think that shows well for the stock."