Better Buy: Emera Stock vs. Hydro One

Higher-risk utility Emera should provide higher returns over the next five years, given the dip and its higher yield.

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Emera (TSX:EMA) and Hydro One (TSX:H) are regulated utilities that investors may be interested in buying and holding the stocks for passive income. Let’s compare the two to see which dividend stock may be a better buy right now.

Stock price resiliency

Higher interest rates have triggered a selloff in capital-intensive utilities this year, as this environment implies increased borrowing costs. Here’s a chart comparing the year-to-date price action of the utility sector, using iShares S&P/TSX Capped Utilities Index ETF as a proxy, and the two regulated utility stocks.

H Chart

H, EMA, and XUT data by YCharts

Although both utility stocks are large caps and have similarly low betas of about 0.25, Hydro One has had much lower volatility. One aspect that attracts investors to utility stocks is their low-volatility nature. In other words, they can be stabilizers for your diversified investment portfolio.

In this sense, Hydro One stock should be praised for being more resilient. Other than falling less during the correction, it has also rebounded already with a gain. In comparison, Emera stock has been an underperformer that also fared worse than the sector. The situation is similar when comparing total returns in the period.

Business

Hydro One takes a leading position as a regulated electric utility in Ontario, Canada’s most populous province. It consists of 99% in regulated transmission and distribution assets, which provides the foundation of highly stable business performance. It enjoys a S&P credit rating of A-. For the first nine months of the year, its revenue increased 8.7% and diluted earnings per share (EPS) increased 8.2%.

Emera is a regulated electric and gas utility that provides more diversification. Currently, it makes 63% of its earnings from the United States. However, it makes close to half of its earnings from Florida. Its main focus will stay in Florida as 75% of its capital plan is in the U.S. state. The utility has an investment-grade S&P credit rating of BBB. Its year-to-date adjusted EPS growth was 5%.

Dividend and growth

Hydro One had its initial public offering in 2015. Since 2016, the stock has increased its dividend by 4.9% per year. At writing, it yields just under 3.1%. Its trailing 12-month (TTM) payout ratio is about 63% of earnings.

Hydro One’s recent rate base growth was approximately 6%. It will have a new distribution rate application for 2023 to 2027 that could change this growth rate. Based on the recent changes in other regulated utilities, my guess is that its new rate-base growth could be 5-6%.

Since 2016, Emera stock has increased its dividend by 6.4%. At writing, it yields just under 5.4%. Its TTM payout ratio is about 67% of earnings. Emera forecasts its rate base growth to be 7-8% through 2025. Consequently, management believes healthy dividend increases of 4-5% is possible through 2025.

Should you buy Emera stock or Hydro One?

Since 2016, Hydro One stock has delivered annualized returns of about 9.8%. For Emera stock, it was 6.5%. Were it not for the recent selloff in the stock, its total returns would be over 9%.

I believe the correction makes Emera stock a better buy right now. Although it’s a higher-risk stock given its worse credit rating, it provides a bit more value than Hydro One. Given its higher yield (that’s still safe), better value, and stable growth, it should deliver higher returns for investors (who can stomach the greater risk) over the next three to five years.

Defensive investors, who think Hydro One is a better fit for their low-risk portfolio, should wait for a dip in H stock before considering purchasing.

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 has no position in any of the stocks mentioned. The Motley Fool recommends EMERA INCORPORATED. The Motley Fool has a disclosure policy.

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