Best Stock to Buy Right Now: Fortis vs Emera

Fortis (TSX:FTS) and Emera (TSX:EMA) are both well-run utilities. Which is the better stock?

| More on:

Image source: Getty Images

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.

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.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Emera and Fortis. The Motley Fool has a disclosure policy.

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »