Fortis Inc. and Emera Inc.: Which Is a Better Investment?

Should you buy Fortis Inc. (TSX:FTS)(NYSE:FTS) or Emera Inc. (TSX:EMA) for income today?

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utility power supply

Utilities are known for their stability and dividend growth. In other words, they’re great long-term holdings and can serve to reduce the volatility of your equity portfolio.

Among them, Fortis Inc.’s (TSX:FTS)(NYSE:FTS) and Emera Inc.’s (TSX:EMA) business performance are more predictable and stable because they largely consist of rate-regulated operations. As a result, they are viewed as lower-risk investments because they have less uncertainty in their earnings expectations.

Let’s compare the two to see which may be a better investment today.

How much is regulated?

Fortis has about 97% of regulated assets. In the first half of the year, Emera generated nearly 88% of its revenue from regulated operations. In the long run, Emera aims to generate 75-85% of regulated earnings.

Dividend safety

Fortis’s payout ratio is expected to be about 65% for this year. Emera has about 90% coverage of its dividend by regulated earnings. Its payout ratio is estimated to be about 80% this year. Fortis’s dividend has a bigger margin of safety, but both dividends should be safe.

dividends

Dividend growth

Fortis has increased its dividend for 44 consecutive years with a three-, five-, and 10-year dividend-growth rate of 7.1%, 5.6%, and 8.6%, respectively.

Fortis, the 15th-largest North American utility by enterprise value, increased its dividend by almost 6.3% in Q4. The annual dividend per share it paid out in 2017 is nearly 6.6% higher than the one paid in 2016. Fortis plans to increase its dividend per share at an average rate of 6% through 2022.

Emera has hiked its dividend for 10 consecutive years with a three-, five-, and 10-year dividend-growth rate of 12.2%, 8.7%, and 8.4%, respectively. The company increased its dividend by almost 8.1% in Q4. The annual dividend per share it paid out in 2017 is nearly 6.9% higher than the one paid in 2016. Emera plans to increase its dividend per share at an average rate of 8% through 2020.

Volatility in a downturn

The higher the multiple investors pay, the bigger the downside risk. During the last recession, from peak to trough, Fortis stock fell roughly 24%. Emera stock fell 19%.

Fortis went from trading at a premium multiple of about 21.6 to a discounted multiple of about 14. Emera went from trading at a premium multiple of about 17.8 to a discounted multiple of roughly 13.8.

Investor takeaway

Investors who want little uncertainty should consider a position in Fortis. The stock trades at a multiple of ~19.2 at $47.30 per share, and it will be uncommon to find it at a bargain. Long-term investors might consider averaging in to the stock over time, while cautious investors might wait for a meaningful dip before buying.

The fact that Fortis tends to trade at a premium to Emera indicates that it’s higher quality. That said, investors will likely get a little more growth from Emera for the next few years.

At ~48.10 per share, Emera trades at a multiple of ~17.9. At a lower multiple, you can also get a higher yield. Emera offers a yield of nearly 4.7% compared to Fortis’s yield of 3.6%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Emera.

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