Canada’s Bank Watchdog Just Dropped Its Risk Outlook: This Dividend Stock Shrugs It Off

Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions (OSFI), looks at risks facing federally regulated banks and insurers. Its October outlook gives investors another reason to think about where their income actually comes from.

A bank depends heavily on borrowers continuing to make payments. A utility depends on customers continuing to use essential services, regulators approving rates and the company being able to finance new infrastructure. Those aren’t the same risks, which is exactly why a diversified income portfolio can help.

EMA

Emera (TSX: EMA) owns regulated electric and gas utilities in Canada and the United States, along with other energy operations. Its customers still need electricity and heat when the economy slows down. That gives Emera a very different earnings engine from a bank. Its results don’t depend directly on mortgage spreads, commercial loan growth or whether credit losses suddenly become a problem.

For investors looking at Canadian dividend stocks, that’s useful diversification. Still, I wouldn’t take “defensive” to mean untouchable. Emera can keep selling power through a financial-market scare while its share price falls or its borrowing costs rise. Essential demand helps the business. It doesn’t make the stock immune from everything else going on.

The latest quarter is a good example. Emera reported second-quarter adjusted earnings of $0.69 per share, down from $0.79 a year earlier. Higher corporate interest expense and foreign-exchange losses contributed to the decline. So even though customers kept using electricity and gas, financial conditions still found their way into the numbers.

Looking ahead

Management nevertheless expects 2026 growth to come in above its 5% to 7% annual adjusted earnings target range, using 2024 as the base year. It doesn’t mean every quarter automatically grows 5% to 7% from the one before it. It’s a longer-term growth target, and some quarters will look messier than others.

What I’d watch is whether earnings per share keep rising fast enough to justify all the money Emera needs to spend on infrastructure. New projects can support future regulated returns. Shareholders only really benefit if those returns comfortably cover the cost of financing them.

What’s more, utilities need a lot of debt. That’s where OSFI’s broader discussion about financial conditions still becomes relevant, even though Emera isn’t a bank. For instance, if Emera had to issue or refinance $1 billion of debt at a rate one percentage point higher, annual interest expense would rise by about $10 million before tax. So after any big financial-risk update, I’d be looking at debt maturities, funding needs and regulatory decisions rather than simply asking whether “utilities are safe.”

Earning income

Emera currently pays a quarterly dividend of $0.73 per share, or $2.93 annually. At a recent share price of $66.29, that works out to a yield of about 4.4%. That leaves $56.50 sitting in cash and produces $439.50 a year. Averaged out, that’s about $36.63 a month, although the dividend actually arrives quarterly.

Just keep all that in perspective. A 10% decline on the $9,943.50 invested would mean a paper loss of about $994, more than two years of that dividend income. The shares also trade around 20.9 times trailing earnings of $3.17. So while the business may be defensive, the purchase price still needs to make sense.

Bottom line

I’d be comfortable holding Emera as part of a diversified Tax-Free Savings Account (TFSA), with any money I need soon kept somewhere safer. OSFI’s outlook is worth reading because it tells us where financial stress could build.

Still, Emera’s dividend story will be decided much closer to home including earnings growth, debt costs, project returns, and what regulators allow the company to recover from customers. Those are the numbers I’d watch before letting one scary risk report chase me out of a long-term holding.

The post Canada’s Bank Watchdog Just Dropped Its Risk Outlook: This Dividend Stock Shrugs it Off appeared first on The Motley Fool Canada.

More reading

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• TSX Today: Why Canadian Stocks Could Fall on Wednesday, October 7

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Emera. The Motley Fool has a disclosure policy.