MENU

Enbridge Inc. vs. Emera Inc.: Which Top Dividend Stock Is a Better Buy?

It seems a sell-off in Canada’s energy infrastructure stocks is far from over. The bearish spell that started almost a year ago has wiped out a big chunk of their market caps and are pushing their valuations into an extremely attractive zone.

Let’s see if Enbridge Inc. (TS X:ENB) (NYSE:ENB) and   Emera Inc. (TSX:EMA) offer long-term value to investors who seek to take advantage of a dip in their share prices.

Enbridge

Enbridge has been one of the worst-performing blue-chip stocks in this downturn. Its share price has fallen 21% this year, extending a 30% plunge during the past 12 months.

The company has been caught up in many headwinds this year amid its transition to North America’s largest energy infrastructure operator following its $37-billion acquisition of Spectra Energy last year.

First, interest-rate cycles reversed in North America, putting pressure on the utility companies’ finances; pipeline operators borrow heavily from the market to fund their expansion. Enbridge has close to $30 billion of development programs in the pipeline and more than $60 billion debt on its balance sheet.

Another setback for Enbridge came in the form of a recent ruling by the U.S. Federal Regulatory Commission that eliminated some tax breaks for master limited partnerships (MLPs). Enbridge Energy Partners L.P., a subsidiary of Enbridge, is one of them.

The ruling, according to the credit ratings agency DBRS Ltd., is likely to cut Enbridge subsidiary’s revenues by $100 million this year, while its distributable cash flow would be $60 million lower as a result of the change.

Emera

Emera, on the other hand, is a less risky bet in this environment of gloom for Canadian utility stocks. The Halifax, Nova Scotia-based Emera has been growing its operations in North America and the Caribbean countries, a diversification that’s working in the company’s favour.

The biggest growth driver for Emera has been its acquisition of TECO Energy, Inc. in 2016, creating a combined entity that’s among the top 20 North American regulated utilities. In 2017, Emera’s operating cash flow surged by 41% to $1.297 billion, helped by the successful integration of TECO Energy.

Emera stock has lost about 13% this year, as investors shunned stocks that are sensitive to interest rate moves. But this temporary pullback offers an opportunity to long-term income investors to buy this solid dividend stock.

Trading at $40.76, Emera’s shares now yield an attractive 5.5%. This annual dividend yield comes with a multiple of 14.1 times estimated 2018 earnings, which is close to the company’s historical low of about 14 last reached during the financial crisis.

Which one is a better buy?

In the current environment, I find Emera a better deal for conservative investors who don’t have much appetite for risk. Another reason to like Emera stock is that the utility gets more than 85% of its consolidated earnings from its regulated business, which is a great stabilizing factor for its bottom line and cash flows. Regulated earnings growth is expected to support the company’s 8% per year dividend-growth target through 2020.

For Enbridge, 2018 is looking to be a tough year when it has to satisfy its investors that it has the muscles to deal with the rising debt cost and successfully complete its growth projects. That said, I still believe the company’s long-term value is intact, so if you have the stomach for higher risks, then its 7% dividend yield looks too tempting to ignore.

2 New Stock Picks Every Month!

From the team that's doubled the market...

Not to alarm you but you're about to miss an important event. You see, renowned investor Iain Butler just revealed his next great stock idea.

And I don't know about you, but I always pay attention when one of Canada's best investors gives me a stock tip.

Click here now to access the details behind Iain's newest ideas.

Fool contributor Haris Anwar owns shares of Enbridge. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.