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Better Value Buy: Fortis (TSX:FTS) vs. Emera (TSX:EMA)

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As the markets remain volatile, investors are now looking at stocks that are trading at a reasonable valuation. They want to invest in stocks that have low valuation multiples, low beta, and that pay a dividend.

Here we look at two Canada-based utility giants to evaluate which is a better value buy at the current price. Utility stocks are generally considered recession-proof and a safe bet in a downturn.

Fortis

Fortis (TSX:FTS)(NYSE:FTS) is an electric and gas utility holding company valued at $18 billion. The stock is currently trading at $41.6, which is 2.8% below its 52-week high. In the last 12 months, Fortis has returned 27.6%, easily outperforming the S&P 500 Index, which is up 9.3% since October 2018.

Fortis is expected to grow sales by 6.5% to $8.93 billion in 2019 and by 5.1% to $9.4 billion in 2020. The stock is valued at 2 times forward sales. Analysts also expect the company’s earnings to rise 2.4% in 2019, 8.2% in 2020, and by an annual rate of 5.5% in the next five years.

Comparatively, Fortis stock is trading at a forward price-to-earnings (P/E) multiple of 19.6 which looks like the stock is overvalued even after accounting for its forward dividend yield of 3.5%. In the last 12 months, Fortis’ return on assets stood at 2.9% while the return to equity was 9.6%.

In 2018, interest payments amounted to $1.02 billion for Fortis. At the end of the second quarter of 2019, Fortis had an operating cash flow balance of $2.5 billion while debt stood at $23.5 billion, indicating enough reserves for debt repayment.

The company has a dividend payout ratio of 48.6% which allows enough room to increase interest payments and increases in capital expenditure. It ended the second quarter with a cash balance of $191 million.

Emera Inc.

Emera (TSX:EMA) is an energy and services company that invests in electricity generation, transmission & distribution, gas transmission, and other utility services.

Emera is valued at $13.25 billion. The stock is currently trading at $55.8 which is 5% below its 52-week high. In the last 12 months, Emera has returned 41%.

Emera sales are expected to fall by 2.1% to $6.39 billion in 2019 and then grow 0.6% to $6.43 billion in 2020. The stock is valued at 2.1 times forward sales. Analysts also expect the company’s earnings to fall by 2.4% in 2019 and rise by 2.1% in 2020. Earnings might rise by an annual rate of 3.8% in the next five years.

Comparatively, Emera stock is trading at a forward P/E multiple of 19.5. The stock is overvalued even after accounting for its forward dividend yield of 4.4%. In the last 12 months, Emera’s return on assets stood at 3% while return to equity was 9.9%.

At the end of the second quarter of 2019, Emera had an operating cash flow balance of $1.63 billion while debt stood at $15.26 billion.

The company has a dividend payout ratio of 72% allowing it some room to increase dividends or pay back debt. It ended the second quarter with a cash balance of $333 million.

Fortis and Emera are trading at similar multiples. However, the higher estimated bottom-line growth for Fortis makes it more attractive for investors. Analysts expect Fortis stock to gain 23% in the next 12 months while Emera is trading at a discount of 4% to average target estimates.

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 Aditya Raghunath has no position in any of the stocks mentioned.

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