Fortis (TSX: FTS) and Emera (TSX: EMA) are two of Atlantic Canada’s biggest utility companies. One is a Newfoundland-based utility with 51 consecutive years of dividend hikes behind it and a continent-spanning business. The other is a Nova Scotia-based utility that does not have quite as many years of dividend increases but does have an equally wide-spanning business. The two companies have a lot in common but certainly aren’t identical. In this article, I will compare Fortis and Emera side by side so you can decide which is the better fit for your portfolio.
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The case for Fortis
The case for Fortis over Emera revolves around the fact that the former company has somewhat better financials than the latter. Fortis boasts the following key financial ratios:
- A 1.4 debt-to-equity ratio (lower is better).
- A 1.48 interest coverage ratio (higher is better).
- A 72% payout ratio (lower is better).
The same ratios for Emera are:
- A 1.5 debt-to-equity ratio.
- A 1.34 interest coverage ratio.
- A 97% payout ratio.
As you can see, Fortis scores better than Emera on the three financial ratios above. Granted, these three ratios do not constitute a complete financial analysis. However, you find the same basic trend if you look at other items on these two companies’ income statements, cash flow statements and balance sheets: Fortis’s metrics generally indicate more financial discipline.
The case for Emera
One thing about Emera that might appeal to some investors is its high dividend yield. At 4.9%, it is considerably higher than Fortis’s, which is just 3.8%.
Emera’s higher yield is a positive for some investors. However, it’s not likely that such investors are rational in their preferences. A high dividend yield could be a drag on performance if it comes from a high payout ratio, as high payout ratios create cash flow management issues. Additionally, Fortis actually has a higher five-year dividend-growth rate than Emera (5.4% vs 3.8%), so if present trends continue, those who buy Fortis today will enjoy a higher yield than those who buy Emera after 10 years have elapsed.
Apart from the questionable dividend advantage, I wasn’t able to find much about Emera that is better than Fortis. Despite being in worse financial shape than Fortis, Emera has a higher price-to-earnings ratio and lesser growth. So, it looks like Fortis is the overall better utility between these two.
Foolish bottom line: Fortis wins
Fortis stock is well known for having outperformed both the TSX and the TSX utilities sub-index over many timeframes. The comparison of Fortis to Emera helps to illustrate why that’s the case. In the notoriously debt-addled utilities sector, Fortis has a relatively sound balance sheet and good interest coverage. Put simply, its financial house is in order. That has led to it having fewer financial problems over the years than its competitors.
So, if I had to choose, I would invest in Fortis over Emera in a heartbeat. Cheaper, growing faster, and financially sounder, it has the edge in just about every category.
