There are many casualties emerging from the backup in bond yields over the past few months, as dividend-paying stocks lose some of their lustre. Among the victims is Emera Inc. EMA-T, but its stock stands out as a bargain.
The Halifax-based company operates regulated electric and natural gas utilities in Atlantic Canada, Florida, Bahamas and Barbados, giving it the geographic diversification and heft prized by investors who want stability.
Next to its key Canadian peers in the utilities sector, though, Emera has been a laggard. Over the past five years, the stock has generated a return of less than 17 per cent, including dividends.
Its total return has trailed Fortis Inc. by 11 percentage points over the same period. And compared with Hydro One Ltd.’s sizzling 98-per-cent return over the past five years, Emera looks like nothing more than a dividend-generator.
The turbulence of the past month has done little to correct this impression.
Strong U.S. economic activity and threats of tariffs from president-elect Donald Trump have stoked concerns about higher-than-expected inflation. The Federal Reserve is now taking a more cautious stance on interest rates, potentially limiting the number of cuts in 2025.
The government bond market is reflecting this shift. The yield on the 10-year U.S. Treasury bond briefly rose above 4.8 per cent on Monday, reaching its highest level since November, 2023, and up sharply from a recent low of 3.6 per cent in September.
The impact on dividend stocks – especially companies with slow, highly regulated growth – has been particularly noticeable.
Utilities, telecoms and real estate investment trusts have been hit hard because their dividend yields essentially follow the trajectory of the bond market: As bond yields rise, dividend yields rise, too.
“The utility sector” – including the Canadian group – “is among the most sensitive to U.S. bond yields, and if rates continue to climb we would expect to see further downward pressure on valuations and investor sentiment,” said Andrew Weisel and Robert Hope, analysts at Bank of Nova Scotia, in a note this week.
Emera’s share price has declined nearly 8 per cent since early December. Fortis Inc. has suffered about the same drop. Hydro One Ltd.’s share price has fallen about 11 per cent since September.
But while Emera is clearly caught in a broad downward trend that is affecting the entire sector, it stands out in a few good ways.
For one, its dividend yield is high, at 5.6 per cent. This should provide some cushioning against rising bond yields, and it offers an attractive alternative to Hydro One’s 2.9-per-cent yield or Fortis’s 4.2-per-cent yield.
Yes, the yield is high for a reason. Although Emera has raised its payout for 18 consecutive years, the rate of increase over the past five years has trailed its peers.
It will likely continue to trail. Last month, the company announced that it will slow the pace of annual dividend increases to a range between 1 per cent to 2 per cent, down from 4 per cent to 5 per cent previously.
Disappointing? Sure.
But this leads to the second reason why Emera merits another look: Slower dividend increases form part of a plan – along with shedding unnecessary assets and targeting higher growth areas, including Florida – to strengthen the utility’s financial profile.
The goal here is to reduce its payout ratio – or how much of its profits are distributed to investors – to 80 per cent by the end of 2027, down from 94 per cent at the end of 2023, while maintaining an investment grade credit rating.
Success should help drive the stock price, as investors consider the upside of profit growth rather than the downside of stretched financial commitments.
Lastly, Emera stands out with a low valuation. The stock trades at 16.6-times trailing earnings, according to Bloomberg.
That is significantly cheaper than both Hydro One and Fortis, and suggests that the stock’s valuation has room to expand if the utility’s growth plans unfold according to plan. And if inflation concerns subside, and bond yields decline? Ka-ching, ka-ching.