Regulated electric utility Emera Inc. (TSX:EMA) has delivered some solid performances and rewarded investors with regular dividend hikes in recent years. Now it has embarked on a major acquisition that has the potential to be a massive game changer for the company.
Now what?
Emera recently announced the acquisition of U.S. electric utility TECO Energy Inc. (NYSE:TE) for just over US$10 billion. It will double Emera’s assets to $20 billion as well as boost its customer base to a total of 2.4 million gas and electricity customers. This is an accretive acquisition that is expected to add to earnings in the first year after it closes, and then grow earnings per share by over 10% by 2019.
However, more importantly, it will give Emera access to what is shaping up as one of the important growth markets for utilities in the Americas, the U.S.
You see, TECO’s assets are located in Florida as well as New Mexico, and its natural gas distribution business in New Mexico is the largest utility in that state. As we have already witnessed, the U.S. economic recovery has truly kicked into gear, and this is creating additional demand for energy among businesses as well as households.
Impressively, even after the transaction Emera expects to generate around 80% of its earnings from regulated sources, virtually guaranteeing its future earnings.
As a result, this transaction will support Emera’s ambitious target of growing its dividend by 8% annually between now and 2019. It will also further reinforce its economic moat.
The strength of Emera’s business, its wide economic moat, and the unchanging demand for electricity have allowed it to continue growing earnings. At the end of 2014 Emera’s income from operations was more than five times higher than it was in 2010, while over the same period net income more than doubled.
It this impressive financial strength that has allowed Emera to regularly hike its dividend, which it has increased every year for the last nine straight years. It now pays a sustainable and juicy 4.5% yield that will reward investors as they wait for Emera’s share price to appreciate in value.
Let’s not forget that low interest rate environments are particularly favourable for electric utilities. This is because the industry is particularly capital intensive and those large investments are predominantly funded by debt.
The current low interest rate environment, with the key overnight interest rate at 50 basis points, its lowest level since July 2010, will act as a powerful tailwind for Emera by reducing borrowing costs. There is also speculation that the Bank of Canada may cut rates further because Canada has slipped into a technical recession, which will be an even bigger boon for Emera.
So what?
It is these characteristics that make Emera an attractive dividend-paying defensive stock. The acquisition of TECO has the potential to be a massive game changer for the company. It will double its assets and give it access to the rapidly growing U.S. electricity market, while catapulting it into the ranks of the top 20 regulated North American utilities. This, I believe, makes now the time to add Emera to your portfolio.
