Is Emera A Buy Or A Hold?

Summary

• Emera is a diversified utility company operating in Canada, the United States, and the Caribbean.
• The company has an active development pipeline that should ensure long runway of growth.
• Emera has a plan to increase its dividend by 8% through 2020.
• Its share price can be impacted by the rising treasury yield.

Investment Thesis

Emera (OTCPK:EMRAF) (TSX:EMA) is a diversified utility company operating in Canada, the United States, and the Caribbean. The company has an active development pipeline that should ensure long runway of growth. It is also planning to increase its dividend by 8% through 2020. However, its share price may continue to be impacted by the rising treasury yield. Despite its strong future growth, investors should be careful finding the right entry point.

Source: Company Website

Reasons why we like Emera's Business

Geographically diversified

Emera has gradually transitioned from a Canadian utility company to a company where majority of its earnings come from operations in the United States. As can be seen from the map below, the company operates in the Atlantic provinces of Canada, several states in the United States, and the Caribbean. Emera's diversification minimizes the risks of any major unexpected events that might happen to one region. In addition, its diversified assets also reduce the impact of any change in regulatory policy in a specific regulatory jurisdiction.

Source: Investor Presentation

A Healthy Development Pipeline

Emera has a healthy development pipeline of projects. As can be seen from the table below, its total capital expenditure through 2021 is about C$8.4 billion.

Development Projects in C$ Million (Source: Investor Presentation)

Significant Growth Opportunity in Florida

As mentioned in the previous paragraph, Emera has about C$8.4 billion of development projects through 2021. One of the places where the company has a lot of growth opportunities is its operation in Florida. The company plans to invest US$883 million to build 600MW of solar capacity over the period of 2018 to 2021. The project is expected to incrementally increase its annual net earnings by about US$50 million upon completion in 2021. Emera has an allowed ROE of 10.25% on this project. Beside the solar project mentioned, the company is also planning to invest US$800 million to convert two of the four coal-fired power units to natural gas.

Source: Investor Presentation

Regulated Operations Bring Stability

Regulated utilities consist about 97% and 99%of Emera's EBITDA and earnings respectively. This means that its business will receive a stable and predicatable revenue and cash flow. This also makes Emera a low-risk investment.

Source: Investor Presentation

8% Dividend Growth Rate Through 2020

Emera has a good track record of dividend increase in the past. Since 2010, the company has increased its dividend at a compound annual growth rate ("CAGR") of 8.7%. Looking forward, the company plans to increase its dividend at a CAGR of 8% through 2020. Currently, Emera pays a quarterly dividend of C$0.565 per share. This is equivalent to a dividend yield of 5.4%. The company continues to target a payout ratio between 70% and 75%. This will leave room for the company to deploy the capital towards accretive acquisitions or development projects.

Source: Investor Presentation

But is it a Buy?

U.S. Tax Reform is Detrimental

Unlike many other sectors that benefited from the U.S. tax reform, regulated utilities do not benefit it much. In fact, Emera expects that the tax reform will have a negative impact on earnings to be around 3% to 5% in 2018.

Rising Treasury Yield is a concern

Since utilities stocks are considered as a bond proxy stock, Emera's share price can be impacted by the treasury yield. Below is the chart that compares share price of Emera with Canada's 10-year treasury yield. The curve in black color is the share price of Emera. The curve in blue color is the 10-year treasury yield. As can be seen from the chart, Emera's share price has a strong inverse correlation with the 10-year treasury yield. In the past 6 months, the 10-year treasury yield increased by about 19% while share price of Emera declined by nearly 12.5%. Since Canada's 10-year treasury yield is expected to continue to rise in 2018, investors should pay attention to the treasury yield to find a better entry point.

Source: MarketWatch

Given that we are in a rising interest rate environment, treasury yield is expected to continue to rise in 2018 and perhaps in 2019 as well. Although the consensus of Emera's target price is about C$50.40 per share (or 22.3% higher than its current share price), I would be very careful. Any sharp increase in treasury yield may result in a revision of Emera's target price.

Source: Thomson Reuters

Investor Takeaway

Emera has a predictable and stable business. It has an active development pipeline that should help increase its rate base and grow its dividend. However, its near-term share price can continue to be impacted by the rising treasury yield. Investors should be careful finding the right entry point.

Note: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

Thank you for reading. If you like my article, please scroll to the top of the article and click on "follow" to receive future updates.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[opelcadet]

I recommend taking a small position now and average down if the price dips

[fintax]

Have owned and dripped since 2013. A keeper in my portfolio. It generates the income I need - let my kids worry about capital gains or losses.
Good write-up, thanks.

[George Fisher]

I owned EMRAF for several years after finding it when it bought my Maine and Maritimes utility and transmission co. Sold it to pay college tuition bills, and have been reestablishing my position. I like the proposed underwater tranmission line directly from NS to the Pilgrim nuke plant in Plymouth MA, bypassing the environuts' impact on the other proposed route though NH and VT.

[User 34796245]

Thank you for your analysis. I hope that you write a follow-up article when you think we’re at a better entry point.

I would love to know more about how the tax bill hurts utilities. I would have thought that a strengthening economy would help utilities as more power will be needed.

I also hope that you write more articles on Canadian companies. The exchange rate is too high for me to convert from CAD to USD right now. Canadian companies with US exposure look very appealing.

What is your target price for EMA?