There’s no question that one of the most effective strategies in long-term investing is to look for companies that combine stability with consistent growth. That’s why dividend-paying utilities like Emera (TSX: EMA) have always been some of the most popular stocks to buy among Canadian investors.
These defensive businesses may not operate in flashy or rapidly changing industries, but that’s exactly the point. Instead, because they provide essential services, they generate billions in recurring revenue and reward investors with predictable cash flow.
That’s why high-quality utility stocks like Emera are particularly appealing for dividend investors since they tend to hold up well during volatile markets. Because even in times of economic stress, people and businesses still need to keep the lights on and the heat running.
That’s why utility stocks are so defensive, a cornerstone for many retirement portfolios and a reliable place for conservative investors to invest their capital for the long haul.
However, while utility stocks are often some of the best investments passive-income seekers can buy, not all utilities are created equal.
For example, some are more diversified, some have better growth prospects, and others come with higher risk profiles.
There’s no question, though, that Emera is one of the best. However, before deciding whether Emera stock is worth buying at today’s prices, it’s important to understand what the company does, where its strengths lie, and how it can play such an important role in building lifelong income.
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Why is Emera such a reliable dividend stock?
Emera isn’t just a high-quality dividend stock because it’s a reliable utility; it’s also one of the largest publicly traded utility companies in Canada with a market cap of roughly $20 billion.
Furthermore, its operations are well diversified, which helps to mitigate what little risk its business has. For example, its operations span electricity generation, transmission, and distribution, with a strong presence in both Canada and the United States. In fact, more than half of Emera’s earnings come from regulated U.S. utilities, giving it both geographic diversification and exposure to markets with growing populations.
Additionally, essentially all of Emera’s operations are regulated, meaning its revenue is tied to rates approved by regulators rather than the open market.
This is crucial because the structure provides stability, since cash flows are largely predictable and less vulnerable to economic swings.
And when its future, revenue, cash flows and earnings are predictable, not only is Emera stock less volatile than almost every other company on the TSX, but it also allows Emera to consistently increase the dividend.
That’s why Emera is one of the best dividend stocks in the country, and why, for nearly two decades, it’s managed to increase the dividend every single year.
Furthermore, not only does Emera use some of the funds from its earnings to return cash to investors, it also invests some of its earnings into expanding and upgrading its operations to drive more growth down the road.
Is Emera worth buying today?
With interest rates expected by many to continue declining in the near term, and with so much economic uncertainty persisting, reliable dividend stocks like Emera have seen their share prices rally in recent months.
In fact, right now Emera is trading just off its 52-week high, and year to date, the share price is up by more than 24%.
To get a better idea of whether Emera stock is worth buying today, though, we have to look at its valuation. For example, Emera currently trades at a forward price-to-earnings (P/E) ratio of 20.4 times. That’s not ridiculously high, but it is above its historical averages.
Over the past five and 10 years, Emera has averaged a forward P/E ratio of 17.7 and 17.8 times, respectively. So, on a forward P/E basis, Emera stock is trading roughly 14.6% higher than its historical averages.
Additionally, its forward dividend yield of 4.4% today is lower than its five and 10-year average forward yield of 5.1% and 4.9%, respectively.
So, although Emera isn’t massively overvalued, the stock is trading above its historical averages in the current market environment. Therefore, while it’s a stock I would certainly recommend adding to your watchlist, you may want to wait for a pullback in the share price before buying Emera stock for the long haul.
