As the economies are starting up all around the world, precautions are still need to prevent the spread of the virus.
The pandemic might of led people to have an epiphany when it comes to their finances. Some of these people will have to want to drastically change their financial situation for the better.
An individual could improve their finances by budgeting their money and fast tracking their debt repayment. An individual might want to grow their passive income through investing.
When it comes to investing, a person could invest for more income via dividend growth stocks.
When it comes to investing, a person could invest for more income via dividend growth stocks.
Investing in dividend growth stocks is a strategy is just as it sounds. Investing in companies the pay dividends and increase the dividends on a regular basis.
When it comes to investing, you do not want to over pay for a stock. Over paying for a stock results in higher risk and lower starting yield.
To determine if a stock is undervalued or overvalued, we due a quantitative analysis on the company in question.
Ultimately, you want to purchase a stock far below the price determined by doing a valuation analysis. The lower the purchase price the better. The lower the purchase the greater the starting yield, which means your money will be working harder for you.
Emera is a utility holding company that started as a single electrical utility in Nova Scotia to a conglomerate in the utility space. Nova Scotia is a small province on the east coast of Canada. Emera has operations in eastern Canada, United States and the Caribbean.
Emera has grown into a major company in the utility space with over $32 billion in assets at end of 2019. At the end of 2019, Emera had approximately 7400 employees and 65% US earnings.
One of the major projects Emera was involved in was the Maritime Link. The Maritime Link which would bring hydro generated electricity produced at Muskrat Falls in the province of Newfoundland and Labrador to Nova Scotia. This project provides electricity to Newfoundland and electricity to Nova Scotia via undersea cable.
Now, I will to an fundamental analysis on Emera Inc. Emera trades on the Toronto stock exchange under the ticker symbol EMA.
Dividend Information
Currently, Emera is trading at $53.75 at the close on July 10. Emera pays an annual dividend of $2.45 per share, or $0.6125 per share quarterly. The stock is currently yielding 4.56%. This yield is 7 bps above the stock's own 5 year average and around 100 bps above that of broader market.
The earnings per share (EPS) for the trailing 12 months is 3.57. The dividend payout ratio is currently 68.6%. This dividend payout ratio for a company in this space is great. The earnings with a company in this space deal with outages and major weather events leading to high costs from time to time.
The 5 year dividend growth rate is 10%. The 10 year dividend growth rate is 8.7%.
Emera has increased their dividend for 13 consecutive years.
Revenues and Earnings
People use utilities to live their everyday lives. Earnings in the short term will be effected due to the COVID19 shutdowns of their industrial and commercial customers. This decrease in revenue will be offset by small increase in revenues from residential customers who utilities will cost more due to being at home more.
Emera grew revenues from $1.5537 Billion in 2010 to $6.111 billion in 2019. That is a CAGR of 16.44% over the last 10 years.
Emera grew by acquisitions by buying utilities and entering generating deals with other energy providers.
Emera grew earnings per share from $1.65 per share in fiscal year 2010 to $2.76 per share in fiscal year 2020. That is a compound annual growth rate of 5.88%.
This EPS growth is lower than what I expected. As the company is transitioning to more renewable energy, I expect the EPS will growth at larger rate due to lower costs to produce electricity.
In 2020, Nova Scotia's block of energy from Muskrat Falls will start to flow. Muskrat Falls is located in Newfoundland and Labrador and will bring electricity to Nova Scotia via an undersea cable. This will help to reduce Nova Scotia's use of coal to provide its electricity needs.
As the companies owned by Emera Inc increase the amount of energy from renewables, the earnings should increase as a result. Emera also has entered into generation agreements with other energy providers to provide energy to customers.
Financial Position
We now move over to the balance sheet. The long term debt to equity ratio is 1.59.
The interest coverage ratio comes in at 2.04. I look for the interest coverage ratio to be over 5 to be comfortable. As their cost will likely go down as energy is produced by more and more renewable sources and paying down their debt, I am not too concerned about this. Their cost should also be reduced to due lower prices of oil, natural gas and coal.
Emera announced they are aiming to grow their dividend between 4 to 5 percent to 2022 a few years back due to their debt. This dividend growth rate still beats the rate of inflation. The dividend was growing at a rate 6 to 9 percent yearly before that.
Over the last 5 years, the average net margin is 9.11% and the average return on equity is 8.24%.
The net margin is basically the amount of revenue, after all expenses, hits the bottom line expressed as a percentage. So, the higher the net margin the better.
Stock Valuation
The P/E ratio is currently 14.93.
This P/E ratio is roughly the same as the broader market, which in this case is the TSX composite index.
The current P/E ratio is a lot lower than the stock's own 5 year average P/E of 24.4.
Looking at cashflow, the current P/CF of 8.4 is slightly higher than the stocks own 5 year average P/CF of ratio of 7.5
The current yield of 4.56% is less than 10 bps higher than the stock own 5 year average yield.
These metrics do not look like the stock is undervalued.
I will use a dividend discount model analysis to try to value the stock.
I factor in a discount rate of 9% and a long term dividend growth rate of 4.25% for 7 years and then grow at 6% thereafter.
This long term dividend growth rates are lower than the stock's 5 year and 10 year dividend growth rate. As the company announced a few years, they are aiming for 4 to 5 percent growth in their dividend out to 2022. So, I being conservative in my approach with the growth rate to err on the side of caution.
The Dividend Discount Analysis gives me a fair value of $58.17.
I like to compare this to a 3rd party, so see if my analysis is reasonable.
Morningstar currently rates Emera as a 3 star stock. This would indicate the stock is equally valued.
Morningstar has a quantitative fair value of $55.68.
I take the average of these two numbers are get a fair value of $56.92.
Conclusion:
The stocks appears to be approximately 6% undervalued as of closing price on June 10.
I would not be a buyer of this stock at this price as the margin of safety is too low. Valuing a stock is not an exact science.
Disclosure: Long EMA in margin account
DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
When it comes to investing, you do not want to over pay for a stock. Over paying for a stock results in higher risk and lower starting yield.
To determine if a stock is undervalued or overvalued, we due a quantitative analysis on the company in question.
Ultimately, you want to purchase a stock far below the price determined by doing a valuation analysis. The lower the purchase price the better. The lower the purchase the greater the starting yield, which means your money will be working harder for you.
Emera has grown into a major company in the utility space with over $32 billion in assets at end of 2019. At the end of 2019, Emera had approximately 7400 employees and 65% US earnings.
One of the major projects Emera was involved in was the Maritime Link. The Maritime Link which would bring hydro generated electricity produced at Muskrat Falls in the province of Newfoundland and Labrador to Nova Scotia. This project provides electricity to Newfoundland and electricity to Nova Scotia via undersea cable.
Now, I will to an fundamental analysis on Emera Inc. Emera trades on the Toronto stock exchange under the ticker symbol EMA.
Dividend Information
Currently, Emera is trading at $53.75 at the close on July 10. Emera pays an annual dividend of $2.45 per share, or $0.6125 per share quarterly. The stock is currently yielding 4.56%. This yield is 7 bps above the stock's own 5 year average and around 100 bps above that of broader market.
The earnings per share (EPS) for the trailing 12 months is 3.57. The dividend payout ratio is currently 68.6%. This dividend payout ratio for a company in this space is great. The earnings with a company in this space deal with outages and major weather events leading to high costs from time to time.
The 5 year dividend growth rate is 10%. The 10 year dividend growth rate is 8.7%.
Emera has increased their dividend for 13 consecutive years.
Revenues and Earnings
People use utilities to live their everyday lives. Earnings in the short term will be effected due to the COVID19 shutdowns of their industrial and commercial customers. This decrease in revenue will be offset by small increase in revenues from residential customers who utilities will cost more due to being at home more.
Emera grew revenues from $1.5537 Billion in 2010 to $6.111 billion in 2019. That is a CAGR of 16.44% over the last 10 years.
Emera grew by acquisitions by buying utilities and entering generating deals with other energy providers.
Emera grew earnings per share from $1.65 per share in fiscal year 2010 to $2.76 per share in fiscal year 2020. That is a compound annual growth rate of 5.88%.
This EPS growth is lower than what I expected. As the company is transitioning to more renewable energy, I expect the EPS will growth at larger rate due to lower costs to produce electricity.
In 2020, Nova Scotia's block of energy from Muskrat Falls will start to flow. Muskrat Falls is located in Newfoundland and Labrador and will bring electricity to Nova Scotia via an undersea cable. This will help to reduce Nova Scotia's use of coal to provide its electricity needs.
As the companies owned by Emera Inc increase the amount of energy from renewables, the earnings should increase as a result. Emera also has entered into generation agreements with other energy providers to provide energy to customers.
Financial Position
We now move over to the balance sheet. The long term debt to equity ratio is 1.59.
The interest coverage ratio comes in at 2.04. I look for the interest coverage ratio to be over 5 to be comfortable. As their cost will likely go down as energy is produced by more and more renewable sources and paying down their debt, I am not too concerned about this. Their cost should also be reduced to due lower prices of oil, natural gas and coal.
Emera announced they are aiming to grow their dividend between 4 to 5 percent to 2022 a few years back due to their debt. This dividend growth rate still beats the rate of inflation. The dividend was growing at a rate 6 to 9 percent yearly before that.
Over the last 5 years, the average net margin is 9.11% and the average return on equity is 8.24%.
The net margin is basically the amount of revenue, after all expenses, hits the bottom line expressed as a percentage. So, the higher the net margin the better.
Stock Valuation
The P/E ratio is currently 14.93.
This P/E ratio is roughly the same as the broader market, which in this case is the TSX composite index.
The current P/E ratio is a lot lower than the stock's own 5 year average P/E of 24.4.
Looking at cashflow, the current P/CF of 8.4 is slightly higher than the stocks own 5 year average P/CF of ratio of 7.5
The current yield of 4.56% is less than 10 bps higher than the stock own 5 year average yield.
These metrics do not look like the stock is undervalued.
I will use a dividend discount model analysis to try to value the stock.
I factor in a discount rate of 9% and a long term dividend growth rate of 4.25% for 7 years and then grow at 6% thereafter.
This long term dividend growth rates are lower than the stock's 5 year and 10 year dividend growth rate. As the company announced a few years, they are aiming for 4 to 5 percent growth in their dividend out to 2022. So, I being conservative in my approach with the growth rate to err on the side of caution.
The Dividend Discount Analysis gives me a fair value of $58.17.
I like to compare this to a 3rd party, so see if my analysis is reasonable.
Morningstar currently rates Emera as a 3 star stock. This would indicate the stock is equally valued.
Morningstar has a quantitative fair value of $55.68.
I take the average of these two numbers are get a fair value of $56.92.
Conclusion:
The stocks appears to be approximately 6% undervalued as of closing price on June 10.
I would not be a buyer of this stock at this price as the margin of safety is too low. Valuing a stock is not an exact science.
Disclosure: Long EMA in margin account
DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
