Best-in-class Emera surpasses the utilities stereotype

Unlike its peer group, Emera is anything but a slow-growth company.

Kirk Paulus 23 July, 2015 | 5:00PM
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Electrical utilities in Canada don't typically receive much attention for anything beyond their often healthy dividend yields. But Emera Inc. (EMA), a major energy provider in the Atlantic Provinces, deserves the spotlight as the best in its class among the very few publicly traded electric companies.

Utilities are often seen as having a lower risk profile, suitable for investors looking for steady dividends and slow, stable growth. While Emera has an excellent track record in paying dividends (currently yielding about 4%), it surpasses the utilities stereotype of being a low-beta, slow-growth investment.

Emera currently rates strongly according to Morningstar's CPMS rankings, including as having significant earnings momentum, which you wouldn't normally expect to find in a utilities stock. On May 5, the Halifax-based company reported first-quarter adjusted earnings of $1.10 per share, surging past the consensus expectation of 76.5 cents. This very pleasant earnings surprise improved Emera's earnings-momentum ranking.

The stock's positive attributes go well beyond its strong balance sheet and history of steady dividend growth. Value-oriented investors, too, can applaud the stock's forward price-earnings ratio of 18.3 -- relatively cheap compared with the sector average of 26.2.

However, in looking at the numbers, what's most impressive is Emera's return on equity (ROE) of 11.6%, versus an industry average of 6.3%. Unlike its peer group, Emera is anything but a slow-growth company.

Furthermore, Emera's above-average profitability appears to be sustainable because of its shift away from coal-fired power generation, and the building of a major hydroelectric project to be completed by 2017.

North America has been experiencing a push to reduce and eventually eliminate reliance on coal-fired energy in order to combat global climate change. This would seem problematic for Emera, since 60% of its power generation is currently produced from four coal-fired plants.

But that's down from 80% in the past. Emera has acknowledged that it is no longer economically nor environmentally sustainable to rely on coal as its primary energy source. It plans to continue to reduce its use of coal in favour of cleaner-burning natural gas and renewable sources like hydro, wind and biomass. Emera's shift away from coal will be critical over the long term in generating value for investors.

Another reason for optimism about Emera's future is the Maritime Link hydroelectric project, which demonstrates the company's long-term commitment to cleaner energy production.

Back in 2010, Newfoundland reached an agreement to bypass Hydro-Quebec through a maritime transmission line. Being constructed by Emera, the project is now nearing completion. The link, which will connect the 824-megawatt Muskrat Falls portion of the Lower Churchill project to the North American grid, is scheduled to be completed in 2017. By comparison, Emera generated 1,250 megawatts from coal in 2014.

With Maritime Link and its other initiatives to shift to lower-cost and lower-carbon sources, Emera is responding well to changes in the power-generation market. That, plus its strong fundamentals across the board, should enable the stock to weather market turbulence over the mid to long term while still delivering growth.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Emera Inc46.99 CAD0.04Rating

About Author

Kirk Paulus

Kirk Paulus  Kirk Paulus is an equity data analyst with the CPMS division of Morningstar. He holds a Bachelor of Business Administration degree from the Schulich School of Business at York University. He can be reached at kirk.paulus@morningstar.com but cannot provide individual advice.

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