Maritime Power 

07/07/2009 12:01 pm EST

Focus: GLOBAL

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Emera's expansion from its Nova Scotia base could juice the utility's dividend growth, writes Tom Slee in The Income Investor.

Emera (TSX: EMA; OTC: EMRAF) is a well-managed, established utility whose shares provide an attractive yield. [It] operates two regulated [units], Nova Scotia Power and Bangor Hydro Electric, which provide electricity to 600,000 customers in the Maritimes and Maine. In addition, the company owns 19% of St. Lucia Electricity Services, 13% of Maritimes & Northern Pipelines, and 10% of Algonquin Power Income Fund. Management's aim is to eventually have 35% of earnings from investments and 65% from Nova Scotia Power (down from the current 80%).

This is a utility with a strong balance sheet and ample cash flow, which is more than sufficient to make its dividend payments and fund capital expenditures. In addition, Emera is now actively looking beyond its regulated business and attempting to generate additional earnings and cash flow. Most recently the company, along with Algonquin Power Fund, has committed to acquire Sierra Pacific Power Company, which [serves] 47,000 customers in Nevada. Emera is also studying the feasibility of building a power transmission line from the Maritimes to southern New England.

The shares pay a C$1.01 annual dividend. [They closed at C$20.87 in Toronto Monday, for a 4.8% yield—Editor.] Looking ahead, earnings are growing and there is a good chance of dividend increases and capital gains.

The company made a profit of 56 Canadian cents a share in the first quarter of 2009, well above the 49 cents analysts were expecting. As a result, Emera is on track to earn about C$1.40 a share this year, compared to C$1.26 in 2008, and close to C$1.50 in 2010.

Cash flow per share is likely to exceed C$2.70 this year and increase again to about C$2.85 in 2010. We should see a dividend increase to C$1.03 during the next six months or so.

Emera's earnings growth was hurt in 2008 by higher energy costs, and this could happen again. Keep in mind, though, that this is a largely regulated utility and is therefore able to pass along increased expenses through rate increases.

A more serious concern is that as the company diversifies, the quality of earnings may decline. However, we are not worried. Even if the new ventures eventually generate 35% of profits, the bulk of Emera's income will remain solid and protect the dividend. Moreover, the chance of additional dividends and capital gains more than compensates for the additional risk.

These high-quality defensive shares are suitable for investors seeking income as well as capital growth who are able to incur a moderate amount of risk and cope with a volatile market.

Earnings are growing at 8% per annum and we can expect dividend increases. Consequently, the shares should increase in value as they reflect this progress. I have set a target of C$24, giving us a possible total return of 25%.

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