New Purchase: EMERA

Following up on my article last week that covered my first purchase in my children’s tuition fund, I’m updating my portfolio with a second purchase. I actually bought shares of 4 different companies in January, but I thought it was more fun to discuss them over 5 different weeks 🙂 hahaha!

As the market dropped like a rock over the first three weeks of 2016, I looked at some interesting picks for a 10-15 year investment horizon.

I purchased 50 shares of Emera (EMA)

Investment Thesis

As long as EMA is using this cash flow to generate more projects, we should see consistent sales growth. Notably, 2 projects (a participation in Maritime Link and an undersea power cable) should be operating in 2017. Surprisingly enough, the budget is actually being followed to the letter and there shouldn’t be any excess spending (maybe we should hire EMA’s management to oversee a few Government handled projects?).

The future looks bright for EMA as it shows several projects for the next decade. Both revenues and EPS have grown steadily over the past five years and the dividends have followed accordingly. EMA is definitely a strong utility to hold. EMA reported clockwork results on November 13th for its Q3. Earnings are up $0.04 EPS compared to last year. Management expects the TECO acquisition should boost EPS by 5% in 2017 and growing to more than 10% by the third full year of operation (2019). EMA restated its dividend growth target of 8% through 2019 and expects to keep this pace past 2019. EMA continues to be a strong holding for any Canadian dividend growth investor.

An investment in EMA is also an investment in a relatively high dividend yielding stock. At the moment, there are a few very interesting high yield (over 4%) stocks on the Canadian market. It is also a gauge of stability. While the Canadian stock market was dropping faster than the 20 inches of snow that fell on our heads last night, EMA posted a solid and steady return coming from both its dividend payment and stock value appreciation:

This will make a good base in my portfolio for the years to come.

Risk

Considering EMA’s very good results in 2015, market expectations will rise in 2016. Don’t expect the company to outperform the market as it did in 2015. However, this is a strong dividend paying company that will help you smoothen out your returns in 2016.

The other risk I can see with EMA is its linked with the coal industry. This is obviously a highly regulated sector that will likely endure tighter regulations in the future. Strict regulations could lead to smaller margins and reduce EMA’s ability to increase its dividend over the long haul.

Valuation

I personally see EMA more as an ATM for my kids’ fund than anything else. This is where the dividend discount model (DDM) is the best to use. Considering a 10% discount rate (a 1% premium has been added due to the risk factor around the energy industry) and a dividend growth rate of 8.5% for the first 10 years reduced to 5% afterward, the company is definitely undervalued at the moment:

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
	Discount Rate (Horizontal)
Margin of Safety	9.00%	10.00%	11.00%
20% Premium	$79.39	$62.90	$51.93
10% Premium	$72.78	$57.65	$47.60
Intrinsic Value	$66.16	$52.41	$43.27
10% Discount	$59.54	$47.17	$38.95
20% Discount	$52.93	$41.93	$34.62

Source: Dividend Monk Calculation Spreadsheet

Considering how the market is currently reacting, I think that solid utilities such as EMA will gain even more attention in 2016 and this is probably why we will see another positive year for this ATM machine.

In the meantime, I’m in for the long haul with this one and am confident that the dividend payment will work its magic ;-).

 

Google+