Utility stocks are best suited for investors looking for stability, consistent dividends, and portfolio diversification. They work particularly well for income-focused and risk-averse investors or as a defensive component during uncertain economic conditions. However, balancing utility investments with higher-growth sectors can create a well-rounded portfolio.
As two leading players in Canada’s utility sector, Fortis (TSX:FTS) and Emera (TSX:EMA) are key providers of essential services like electricity and natural gas distribution. But how should you choose between them? Let’s delve into a detailed analysis to determine which one is a better investment.
Similar to Fortis, Emera is a leading provider of electricity and natural gas utilities, operating primarily in Canada and the United States. In recent years, Emera has been heavily investing in renewable energy, positioning this as a long-term growth driver.
Emera’s strategy focuses on expanding its portfolio of renewable energy, committing to clean energy solutions like solar power to align with global carbon-reduction initiatives. This focus on greener energy could drive long-term growth for Emera, especially as governments and corporations accelerate their sustainability efforts.
Although Emera is also known for its dividend payouts, its track record does not compare to Fortis. Emera has increased its dividend for 18 consecutive years, which is significantly shorter than Fortis’s 50-year record. Additionally, its growth has been slower, resulting in a higher payout ratio. This indicates that Emera faces greater challenges in maintaining financial flexibility. For example, its most recent dividend increase was only 1%, compared to Fortis’s 4.2% growth.
Fortis is among Canada’s largest utility companies, with operations spanning Canada, the United States, and the Caribbean, serving 3.5 million customers. As a stable and diversified utility company, Fortis mainly focuses on essential services, including electricity and natural gas transmission and distribution.
What attracts investors to this blue-chip stock is its long-standing track record of consistent dividend growth. As one of the most reliable dividend payers on the Toronto Stock Exchange, Fortis has steadily increased its dividend for 50 consecutive years, providing investors with a reliable income stream. This sustained dividend growth showcases the company’s ability to generate predictable cash flows through its regulated utility operations, while also highlighting its management’s commitment to delivering shareholder returns.
Fortis has also achieved growth through strategic acquisitions. Its expansion in the U.S., such as the acquisition of ITC Holdings, has bolstered its operational scale and asset diversification. This expansion strategy has enabled Fortis to benefit from a steadily growing customer base and increasing energy demand.
However, Fortis’s growth-oriented strategy comes with certain challenges. Utility companies often rely heavily on debt financing to drive business growth, and Fortis is no exception, with substantial debt levels. While its management has demonstrated strong financial discipline, rising interest rates and increasing debt servicing costs could put pressure on the company’s earnings. Nevertheless, the stability of its regulated operations enables Fortis to generate steady revenues, making it a reliable choice for conservative investors.
Overall, both Fortis and Emera are fairly valued at the moment, leaving little room for a significant margin of safety. Emera offers a higher dividend yield of approximately 5.4%, compared to Fortis’s 4.1%. However, Fortis stands out with its longer history of consistent dividend growth and greater financial stability. Fortis’s dividend payout ratio, at 73%, is sustainable and reflects its strong ability to maintain reliable dividend payments.
When considering long-term investments in the utility sector, both companies have their strengths. However, for conservative investors seeking stable, long-term returns, Fortis, with its diversified operations and exceptional track record of dividend growth, clearly stands out as the better choice.
