Can you provide your opinion on Emera Inc. EMA-T please?
Emera is in a period of transition. For dividend investors, one of the most important developments was the company’s decision in June to slow its dividend growth rate to between 1 per cent and 2 per cent annually, down from its previous growth target of 4 per cent to 5 per cent. The company followed through with a 1-per-cent hike this week, raising its dividend to $2.90 annually.
While investors might be disappointed with the slower dividend growth rate, it’s a prudent decision that has several benefits for the Halifax-based utility operator.
First, it will reduce Emera’s dividend payout ratio to a projected 80 per cent of adjusted earnings by the end of 2027, down from slightly more than 100 per cent in 2024. The payout ratio will fall further in the following years, the company says.
Second, lowering the dividend growth rate will free up more capital for investment opportunities across Emera’s regulated utility businesses. About 75 per cent of Emera’s planned capital spending of $8.8-billion from 2024 through 2026 is being directed to its two Florida utilities, Tampa Electric and Peoples Gas, to support a growing base of customers and fortify its infrastructure against increasing climate-related threats. At Nova Scotia Power, Emera is also investing to improve reliability and meet government-mandated decarbonization goals.
By investing billions of dollars to expand and modernize its utilities, Emera is aiming to increase its rate base – the value of assets on which a utility is permitted to earn a regulated rate of return – by 7 per cent to 8 per cent annually over the next five years through 2029. This will help to support average earnings per share growth of 5 per cent to 7 per cent annually through 2027, the company has said.
At the same time, with credit monitoring agencies having put Emera on notice for potential downgrades, the company has been divesting assets to strengthen its balance sheet and preserve its investment grade ratings. This includes the recent sale of its equity interest in the Labrador Island Link (LIL) to KKR & Co. Inc. for $1.19-billion and the pending sale of New Mexico Gas Co. to Bernhard Capital Partners for net proceeds of US$750-million, with closing expected in late 2025.
Analysts say these initiatives, combined with falling interest rates and an expected favourable rate case decision for Tampa Electric in November, should help to improve investor sentiment toward the stock (EMA-T). Emera’s shares, which yield 5.6 per cent, have gained about 14 per cent since the start of July, as the entire utilities sector has been lifted by falling interest rates. But the shares, which closed Friday at $52.48, are still well back of their record high of more than $65 in June, 2022, when interest rates were beginning their sharp rise.
The tone among analysts seems to be one of guarded optimism. After hosting investor meetings with Emera CEO Scott Balfour, CIBC World Markets analyst Mark Jarvi said in a note this month that Emera “has taken significant actions to turn around its financial position, and we come away from the meetings feeling modestly more confident that EMA is embarking on a more stable and positive growth path.”
However, he added that “there are still some key de-risking events to accomplish, and the market may take a little while before it rewards EMA with a higher relative trading multiple. While we lean a little cautious, which informs our ‘neutral’ rating [on the stock], we believe investors should keep an eye on this name as it could present an interesting yield plus modest re-rating opportunity.”
Full disclosure: I own Emera shares personally and in my model Yield Hog Dividend Growth Portfolio. (View the portfolio online at tgam.ca/dividend-portfolio).
I have about $25,000 of unused contribution room for my tax-free savings account. In my non-registered account, I have 200 shares of Bank of Montreal BMO-T that I bought roughly 10 years ago and are now worth about $2,400. I was wondering if I can deposit the shares into my TFSA to use up most of my contribution room.
You certainly can. It’s called an “in-kind” contribution, and it will save you from having to sell your BMO shares, contribute the cash to your TFSA, then repurchase the shares. In addition to avoiding brokerage commissions, you will maintain uninterrupted ownership of the shares, so you won’t have to worry about missing out on any potential gains in the stock price.
However, you should be aware that, when you transfer shares from a non-registered account to a TFSA (or other registered account), it is treated as a “deemed disposition” in the eyes of the Canada Revenue Agency. That means, if your BMO shares have appreciated in value since you initially purchased them, you will be responsible for reporting any capital gains on your tax return using the price at the time of the transfer as your “sale” price.
You’ll have to do the precise capital gains calculations yourself, but I can give you a rough ballpark. Ten years ago, BMO was trading at around $82 a share. Transferring your 200 shares at their current price of about $120 would trigger a capital gain of about $7,600.
The good news is that, if your capital gains in any given year total $250,000 or less, only half of the gains are included in your income for tax purposes. For the portion of capital gains above $250,000 in any year, the inclusion rate is 66.7 per cent.
One final thing to keep in mind: If you transfer a stock with an unrealized loss to a registered account, you will not be able to claim the loss for tax purposes. In such cases, it might be more advantageous to sell the security first, then contribute the cash to your TFSA or other registered account, which will allow you to claim the loss. However, you must wait at least 30 days to repurchase the shares or it will be considered a “superficial loss” by the CRA.
Capital losses must first be used to offset any capital gains in the current year. Any remaining capital losses can be carried back up to three years, or forward indefinitely, to offset capital gains in other years.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.