EMA:CC - 2 Utility Stocks With Sought-After Stability
2023-03-30 10:30:00 ET
The stocks of regulated utilities are as stable as businesses can get. Particularly, they are regulated such that they are able to earn certain returns on equity on their investments. Therefore, their earnings are decently stable and predictable.
Fortis ( TSX:FTS ) and Emera ( TSX:EMA ) are two stable, regulated utility stocks that conservative investors can consider for their long-term investment portfolios.
Fortis stock
Fortis is a defensive pick that provides excellent diversification. Its business is comprised of 10 regulated utility operations across Canada, the United States, and the Caribbean. To be clear, it has 93% transmission and distribution assets, which provide essential services and are, therefore, low-risk assets. Altogether, the utility has a high-quality portfolio that provides essential services to 3.4 million electric and gas customers.
This year, Fortis expects its rate base to reach $36 billion. It has a multi-year capital plan to grow its rate base to $46.1 billion by 2027. Specifically, it has a five-year capital plan that’s worth $22.3 billion. Two-thirds of the capital investments are in core distribution and transmission projects, while approximately 26% are in cleaner energy investments like renewable energy and cleaner energy fuels.
Its capital investments will be more or less around $4.5 billion each year. About 83% of the capital plan consists of smaller projects, which are lower risk than its major projects. As well, 55% and 41%, respectively, of the projects are in the stable countries of the U.S. and Canada.
Management expects this foreseeable growth to be able to support dividend growth of about 5% per year through 2027 in the dividend stock . The dividend growth will be an extension of Fortis’s track record of 49 consecutive years of dividend increases.
At $57.10 per share at writing, Fortis stock offers a safe dividend yield of just under 4%. Its recent payout ratio was sustainable at roughly 78% of adjusted earnings. There’s no discount on the stock right now, as investors go after stability in a highly uncertain economy.
Emera stock
Like Fortis stock, Emera stock is also a Canadian Dividend Aristocrat. Emera’s 10-year dividend-growth rate of 7% is better than Fortis’s rate of 6.1%. In other words, in this period, Emera stockholders earned 8.8% more in income than Fortis shareholders. Specifically, Emera stock has increased its dividend for 16 consecutive years.
Currently, Emera has a capital plan, through 2025, with investments of $8-$9 billion. Management forecasts that these investments will grow its rate base by about 7.5% annually in the period. Although this is a higher growth rate than Fortis, it’s not as far into the future and, therefore, is less predictable. Additionally, Emera stock’s recent payout ratio of about 84% is higher than Fortis’s. This is why Emera expects to increase its common stock dividend by about 4.5% per year through 2025 (a lower growth rate than Fortis’s and again not forecasting as far into the future as Fortis).
Emera is also a less-diversified utility than Fortis. Its capital plan, with 75% of investments in Florida, is a demonstration of the higher concentration. The higher risk in Emera versus Fortis is why it offers a higher dividend yield of close to 5%. At $55.59 per share at writing, Emera also appears to be fairly valued.
The post 2 Utility Stocks With Sought-After Stability appeared first on The Motley Fool Canada .
Fool contributor Kay Ng has no positions in any stocks mentioned. The Motley Fool recommends Emera and Fortis. The Motley Fool has a disclosure policy .
2023