This October, the markets have been on a major down slide. With the Dow losing almost 10% of its value and the TSX Index sliding for weeks, many investors have the dreaded “R” word on their mind — that word being recession. While not all market corrections turn into recessions, many do.
And even corrections that don’t end up spreading to the broader economy can last for a long time. Historical data shows that the average bear market lasts 1.4 years. While that’s shorter than the average bull market (which lasts about nine years), it’s long enough to cause investors some anxiety.
Fortunately, there’s one sector that tends to do well in down markets: utilities.
Utility stocks generate stable, consistent income due to their quasi-monopolistic nature and the fact that people need power even in the worst of times. Historical data shows that utility stocks tend to outperform in down markets. And even when their shares fall, utilities offer above-average dividend income.
Fortis Inc (TSX:FTS)(NYSE:FTS) and Emera Inc (TSX:EMA) are two of Canada’s best known utility stocks. In this article I’m going to compare the two to help jittery investors decide which is best for their portfolio. I’ll start by looking at historical performance.
Both Fortis and Emera are down year-to-date, with significant upswings occurring in late October when the market began to tank. Between the two, Emera is down more, at about 14% (compared to 5% for Fortis). Zooming out to a five-year timeframe, both Fortis and Emera are up, but not much; Fortis has gained 34% while Emera is up 29%. This works out to annualized returns of about 6 to 7 percent.
Both Fortis and Emera exhibit steady, but not frothy long-term earnings growth.
However, both companies also saw their earnings fall in Q2. Fortis’ EPS were down $0.57 from $0.62 a year before. In Emera’s case, it was $0.48 this year compared to $0.55 a year before. Fortis’ miss was attributed to losses on derivatives, while Emera’s miss was attributed to “timing, weather and foreign exchange rates.”
Emera’s Q2 earnings decline was slightly sharper than Fortis’.
Both Fortis and Emera pay above-average dividends with excellent dividend growth. At the time of this writing, Fortis’s dividend yielded about 4%, while Emera’s yielded 5.84%. This gives Emera a clear upper hand in the short term. However, Emera’s earnings woes are worse than Fortis’, which makes a dividend cut somewhat more likely for Emera. History seems to support this point as well: Fortis’ dividend-raising streak has lasted for 44 years, while Emera’s has lasted just 11.
Fortis and Emera can both be viewed as typical utility stocks: you get a lot of stability and generous income while waiving the possibility of huge returns. This is what makes such stocks popular during market downturns.
Between the two of them, Fortis has slightly better fundamentals, while Emera has a better dividend yield. Adding Fortis’ lower P/E ratio into the equation is enough to tip my scales in its favour, though income-hungry investors may still prefer Emera.
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Fool contributor Andrew Button has no position in any of the stocks mentioned.