John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Last September, when shares of Emera Inc. had stumbled on concerns about a big U.S. acquisition, I wrote a column outlining the deal's many benefits. Specifically, I said the $10.4-billion (U.S.) takeover of Tampa-based electric and gas utility Teco Energy Inc. would improve Emera's diversification, increase its earnings stability and – perhaps most important to income investors – enhance Emera's future dividend growth.
"Because I'm focused on the long term, I'm not troubled by the recent softness in Emera's share price. If anything, I'll consider adding to my position," I wrote.
Well, I did add to my position – I own the shares personally – and I'm glad I did because the Teco deal has played out pretty much as I expected. As I've written many times, buying solid companies when their shares are suffering a setback is a proven investing strategy and Halifax-based Emera provides a classic example.
Since my column appeared in September, shares of Emera – the parent of Nova Scotia Power Inc. – have gained about 16 per cent. That's from price appreciation alone. The total return – assuming all dividends were reinvested – was more than 19 per cent.
What's more, on July 4, Emera announced a 10-per-cent increase to its dividend, raising its payment to $2.09 on an annual basis from $1.90. Following through on a pledge it made when the Teco deal was announced, Emera also extended its annual dividend growth target of 8 per cent by an additional year, to 2020.
Dividend increases are a strong signal of confidence. When a company exceeds its own dividend growth forecast and also projects increases several years into the future, as Emera has done, it sends an even more powerful signal. Most companies aren't in a position to make such projections, but because Emera derives most of its earnings from regulated utilities, its cash flow is relatively predictable.
Now, it's important to understand that dividends – and dividend increases – are not official until the board approves them. Companies usually won't project dividend hikes unless they're highly confident they can deliver, but occasionally dividend forecasts do change.
Earlier this year, for instance, pipeline operator Enbridge – faced with uncertainties surrounding certain projects in an environment of low oil prices – trimmed its dividend growth forecast to 10 to 12 per cent from 14 to 16 per cent. Enbridge based the new forecast on its "secured capital program only" and said "there is still upside to our dividend growth outlook based on our unsecured development pipeline."
In Emera's case, the company expressed conviction that its growing cash flow will support dividend increases for the next several years at least.
"The significant earnings and cash accretion expected from the Teco Energy acquisition, combined with the growth potential for the merged businesses, has provided our board of directors with the confidence to increase the common share dividend by 10 per cent, and extend the 8-per-cent dividend growth target through 2020," Chris Huskilson, chief executive officer of Emera, said in a statement.
The recent dividend hike came just three days after Emera announced that it had completed the Teco acquisition, calling it a "perfect fit" for the Canadian company. The deal adds about 725,000 Tampa Electric customers, nearly 365,000 Peoples Gas accounts across Florida and more than 515,000 New Mexico Gas customers.
It's a transformative acquisition for Emera, doubling the company's size and boosting the proportion of EBITDA (earnings before interest, taxes, depreciation and amortization) from U.S. operations to more than two-thirds from less than half before the acquisition.
It also paves the way for solid earnings growth.
Citing "significant" growth opportunities for the newly acquired U.S. assets, Emera projects a 5-per-cent boost to earnings per share from Teco in 2017 – the first full year of operations under Emera – rising to more than 10 per cent by 2019. It also increases the proportion of regulated earnings to nearly 85 per cent – the top end of Emera's target range – from less than 75 per cent in previous years, contributing to stability of Emera's results.
No stock is risk-free, of course. If interest rates rise significantly, shares of Emera and other utilities could take a hit. Another source of uncertainty are delays and cost overruns facing the Muskrat Falls hydroelectric project that will transmit electricity from Labrador to the island of Newfoundland. However, Emera's financial risk is limited to the Maritime Link portion that will ship power on to Nova Scotia from Newfoundland and that project remains on schedule and on budget.
Even with those uncertainties, investors can almost certainly count on Emera to keep its earnings and dividends growing for many years to come. Be sure to do your own due diligence before investing in any security.