Emera: Canadian Utility Looks South

10/03/2016 8:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

We periodically run a screen to see if some of our favorite utilities are approaching a compelling valuation, or at least a more reasonable price, notes Ari Charney, editor of Investing Daily's Income without Borders.

Right now, the Canada-based utility holding company Emera Inc. (Toronto: EMA, OTC: EMRAF) has one of the lowest price-to-earnings ratios (P/E) among utilities that derive most of their earnings from regulated operations.

The Canadian utility has made cross-border deals with hopes of boosting growth to offset a weak economy in the Great White North.

Emera's $10.4 billion acquisition of Florida-based TECO Energy closed in July. The deal should prove to be transformative for the Canadian acquirer.

Emera now derives the vast majority of its earnings from the faster-growing U.S. (currently around 71% of earnings vs. 40% prior to the deal).

This puts it on a stronger earnings-growth trajectory, of around 8% annually through 2019.

Robust earnings growth should also flow through to the dividend, which has grown by 8.4% annually over the past five years, for a forward yield of 4.5%.

One concern is that the TECO deal was a sizable one for Emera, and leverage has risen accordingly, to around 5.1 times net debt to EBITDA. But that should decline as TECO's earnings start going to Emera's bottom line.

Analysts are largely bullish on the stock; the consensus 12-month target price is US$40.98, which suggests potential appreciation of 15.4% above the current price.

In addition to its attractive valuation and dividend growth, Emera also offers value-conscious US income investors another enticement.

The decline in the Canadian dollar, recently just below US$0.76, affords an opportunity to buy into a mostly US company at a nearly 25% discount.

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