Fortis Inc (TSX:FTS) and Emera (TSX:EMA) are two of Canada’s best-known utility stocks. The former is a Newfoundland-based utility with assets across Canada, the US, and the Caribbean. The latter is a Nova Scotia-based utility that does business in the same areas as Fortis. The two companies are very similar. However, there are notable differences that distinguish them. For example, Emera has a higher dividend yield than Fortis, but also a higher payout ratio. So, the opportunities here are not the same. In this article, I will explore Fortis and Emera side by side so you can decide which utility stock is a better fit for your portfolio.
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Operations
In terms of operations, Fortis and Emera are pretty similar. However, there are some differences worth noting – specifically in their domestic operations. Fortis’ power sources in Canada are almost entirely hydro and natural gas, while Emera still burns some coal. The Federal government has been pushing renewable energy for some time now, and it would appear that Fortis has an edge here in supplying mostly renewable power. The government expects Emera to get its carbon footprint down and that will require finding non-coal sources, which will cost money. So, Fortis investors may expect less climate-related capital expenditures going forward than Emera investors should expect – that’s a point in favour of Fortis.
Growth
Fortis broadly appears to have Emera beaten on historical growth rates. In the last 12 months, it grew its revenue and earnings -3% and 6.2%, respectively. Over the last five years, it compounded its revenue at 5.3% and adjusted earnings at 9.4%. The revenue and earnings growth rates for Emera were respectively -6.8% and -49% in the TTM period, and 3.3% and 1.3% in the five-year period. So, Fortis looks like it is growing faster than Emera.
Profitability
Profitability is another factor on which Fortis takes the cake over Emera. Fortis has a 44% gross margin, a 29% EBIT/operating income margin, a 14.5% net margin, and a 7.8% return on equity. Emera has a 42% gross margin, a 21.6% EBIT margin, a 9.7% net margin, and a 5.9% return on equity. So, between these two companies, Fortis has the higher margins and returns on equity.
Dividends
Last but not least, we can look at the matter of dividends. Emera has a 5.4% dividend yield, but it may not be sustainable, as the payout ratio is 105%. A payout ratio over 100% indicates that a company pays out more in dividends than it earns in profit. Fortis by contrast has a relatively modest 4% yield that is quite well supported by earnings, with a quite sustainable 75% payout ratio.
Final verdict
Taking everything into account, I find Fortis to be a better utility play than Emera. It is more profitable and growing faster than the latter company is, while having a more sensible payout ratio. Despite all of this, Fortis is valued quite similarly to Emera by the markets. So I definitely think Fortis will fare better than Emera going forward, and thus is a better buy.
