Why This Top Utility Stock Is a Good Bargain Today

Emera Inc. (TSX:EMA) is one of the top energy utility stocks which will benefit from the changing interest-rate expectations in Canada.

| More on:

Utility and energy infrastructure companies have had a rough year. Their stocks came under severe selling pressure as the central banks in both Canada and the U.S. raised interest rates, thus diminishing the investment appeal of these companies.

But the latest macro developments suggest that it will be tough for the Canadian central bank to be aggressive in hiking the borrowing costs when the threat of trade war with its largest trading partner is becoming real and a possible deal on North American Free Trade Agreement (NAFTA) is unlikely anytime soon.

The reflection of this uncertain rate outlook is more evident in the currency markets, where Canadian dollar has weakened to a nearly one-year low against its U.S. counterpart.

If Bank of Canada is going to move on the sidelines until we have some clarity on the trade front, then it’s a good idea to start fishing for some beaten-down energy stocks, which hold good potential to outperform due to their business strength.

If you’re in the market to earn stable dividend income, investing in energy infrastructure stocks is probably the best bet, given that the share prices are down and yields are attractive. The Halifax, Nova Scotia-based Emera Inc. (TSX:EMA), one of the top 20 North American regulated utilities, is one such top utility stock that you can consider in this environment. Here’s why.

Regulated rates

Emera’s 85% consolidated earnings come from its regulated business. This is one of the biggest advantages of investing in regulated utilities, as certainty in their cash flows makes its easier for the management to distribute profit in the shape of growing dividends.  In case of Emera, the growth in earnings is expected to support the company’s 8%-per-year dividend-growth target through 2020.

The latest earnings report shows that Emera is in a good position to continue with its growth momentum. Its first-quarter results exceeded analysts’ expectations, helped by a solid performance from its utilities in Florida and New Mexico and the recent launch of the Maritime Link transmission line connecting the island of Newfoundland to Nova Scotia.

The bottom line

Utilities like Emera are classic rate-sensitive stocks, which is the main reason that its stock is down 15% during the past 12 months. But this weakness has taken the company’s dividend yield to 5.49%, which is a much better return when you compare it with GICs. With a five-year dividend growth of 9.4%, this stock is a great bargain for long-term investors.

Going forward, I don’t see any possibility that will force this stable utility stock to cut its dividend, especially when the company’s payout ratio, at 70-75%, is well within a manageable level. 

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 Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Dividend Stocks to Buy Now Under $50

Here are two of the best under-$50 dividend stocks you can buy in Canada right now.

Read more »

TELECOM TOWERS
Dividend Stocks

If I Could Only Buy 1 Stock Before 2023, This Would be it!

If you could buy 1 stock before 2023, what would it be? Here’s the stock I’m considering, and I think…

Read more »

Beautiful holiday decorated background with christmas gift boxes ,fir. christmas holiday concept
Dividend Stocks

3 Dividend Stocks to Help Offset Holiday Spending

The holidays are here, and so is the seasonal spending. Offset some of those costs by putting your investment cash…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

The 3 Passive-Income Stocks I’m Buying Next and Never Selling

These passive-income stocks have a proven track record of growth and a solid sector that will guarantee income for decades.

Read more »

oil and gas pipeline
Dividend Stocks

Enbridge Stock Rose More Than 4.5% in November: Is it a Buy Today?

Enbridge is having a good year. Are more gains on the way for the stock?

Read more »

worry concern
Dividend Stocks

3 Budget Mistakes Almost Everyone Makes

Leave these budget mistakes in 2022 and enter 2023 with more cash on hand and a better way of spending.

Read more »