Canadian utility stocks Fortis (TSX:FTS) and Emera (TSX:EMA) are boring investments, yet they are most sought-after by risk-averse investors for business stability. Either company provides uninterrupted passive income streams and is an excellent income compounder regardless of the economic environment.
While the stock market is recovering, it can go topsy-turvy without warning. Fortunately, the utility sector is the third-best performing sector thus far in 2023 and continues to outperform the broader market (+7.62%). Meanwhile, Fortis and Emera are doing better, given their year-to-date gains of 11.26% and 12.88%, respectively.
Hail the King!
Trumpets will soon blare for Fortis as it officially becomes Canada’s second dividend king in 2023. The first in the elite group, Canadian Utilities, belongs to the same sector. Finally, something is exciting for the utility stock as it marks 50 consecutive years of dividend increases.
You can purchase Fortis at $59.67 for the decent 3.79% dividend. The yield isn’t the highest in the market but you get peace of mind in return. This $28.9 billion electric and gas utility company has 10 utility operations in 17 jurisdictions and is virtually 100% regulated.
Will the dividend stop growing after the streak of 50 years? The answer is a resounding NO! Management has an annual dividend growth guidance of 4% to 6% through 2027. The new $22.3 billion five-year capital plan ($4.4 billion average annual capital) from 2023 to 2027 is highly executable and should support the dividend growth target.
The capital allocation is highest in the U.S. (55%), followed by Canada (41%) and the Caribbean (4%). According to management, Fortis won’t need discrete equity as cash from operations and debt at its regulated subsidiaries will fund the capital plan. Fortis expects the capital plan to support the low-risk rate base growth.
From $34.1 billion in 2022, the rate base should grow by a compound annual growth rate (CAGR) of 6.2% to $46.1 billion in 2027. More importantly, the long CAPEX runway includes building more renewable generation facilities to reduce greenhouse gas (GHG) emissions. Fortis is on track to reach its carbon reduction targets of 75% by 2035 (28% reduction since 2019).
Fortis has maintained its investment-grade ratings due to its low business risk profile. President and CEO, David Hutchens, takes pride in the nearly 11% average annual total shareholder returns over 20 years. The figure alone lends confidence to invest in the soon-to-be dividend king.
An equally defensive asset
Emera’s dividend growth streak is only 16 years compared to the 50 of Fortis, but it’s an incredible feat, too. At $57.67 per share, the dividend offer is higher at 4.79%. The $15.7 billion multinational energy holding company owns a portfolio of high-quality regulated utilities and is well-positioned to meet its customers’ current and future energy needs.
As of year-end 2022, Emera’s average rate base was $25 billion. However, because of its three-year capital plan ($8 to $9 billion), it should grow by 7% to 8% in two years. Thus, management targets a sustainable dividend growth of 4% to 5% through 2025. The population growth in Florida and Atlantic Canada should also drive customer growth.
Go-to stocks
Fortis and Emera have never been high-flyers but are go-to stocks when the going gets tough. Buy one or both utility constituents today and you’ll likely keep them for years.
