Emera's Preferred Shares Offer 6.09% Yield Amid Discounted Valuation—A Utility-Backed Opportunity

Investors seeking steady income in a rising rate environment may find an intriguing opportunity in Emera Inc.'s Series E Preferred Shares (EMA.PRE.CA). These shares currently offer a 6.09% yield while trading at a -26.12% discount to their $25 liquidation preference, combining attractive valuation with the stability of a regulated utility. Let's dissect the key drivers of this opportunity and the risks to consider.

The Discounted Valuation: A Reward for Risk-Tolerant Income Seekers

EMA.PRE.CA shares are trading at $18.47, a stark contrast to their $25 liquidation value. This discount reflects broader market skepticism toward preferred shares in a rising rate environment—when rates climb, preferreds typically decline in price. However, the 6.09% yield (based on an annual dividend of $1.125) compensates investors for this risk.

The discount also presents a potential "floor" for the shares. If Emera's creditworthiness holds (its AA- rating suggests stability), the $25 liquidation preference acts as a long-term anchor. Investors could benefit from both income and capital appreciation if rates stabilize or the market reassesses utility stocks.

Dividend Sustainability: A Utility's Steady Cash Flows

Emera, a regulated utility with operations in Canada and the Caribbean, generates predictable cash flows from its electricity and gas distribution networks. This stability underpins the Series E's cumulative dividend protection, meaning missed payments must be made up before common shareholders receive dividends. Additionally, the dividend qualifies as eligible for Canadian tax treatment, boosting after-tax returns for domestic investors.

The company's track record is solid: Emera has maintained consistent preferred dividends despite macroeconomic headwinds. Its AA- credit rating (among the highest for utilities) and dividend covenant protections further insulate preferred shareholders.

The Perpetual Structure and Redeemable Feature: Balancing Risk and Flexibility

EMA.PRE.CA shares are perpetual, meaning they lack a maturity date unless Emera redeems them. This perpetual nature means investors must be comfortable with indefinite holding—though the redeemable feature adds a layer of flexibility.

• Redemption Risk: Emera can call the shares at $25 at any time. In a falling rate environment, this could prompt a buyback, forcing investors to reinvest proceeds at lower yields.
• Upside in Rising Rates: Conversely, in a high-rate environment, Emera may delay redemption, allowing investors to lock in the 6.09% yield.

The -26.12% discount to liquidation preference already prices in some redemption risk. For now, with rates near peaks, the likelihood of an immediate redemption is low, making the current yield a compelling trade-off.

Risks to Consider

• Rate Sensitivity: Preferred shares are interest-rate sensitive. Further rate hikes could pressure prices, though the steep discount limits downside risk.
• Regulatory Changes: Emera's regulated operations depend on government approvals, which could affect cash flows.
• Credit Downgrade: While unlikely given its AA- rating, a downgrade would weaken investor confidence.

Investment Thesis: A Utility-Backed Income Play

EMA.PRE.CA offers a compelling risk-reward profile for income-focused investors:
1. High Yield: The 6.09% yield outperforms most bonds and Canadian preferreds.
2. Safety Net: The cumulative dividend and liquidation preference provide downside protection.
3. Tax Efficiency: Eligible dividends reduce Canadian investors' tax burden.
4. Utility Stability: Emera's regulated cash flows reduce earnings volatility.

For a diversified portfolio, these shares could serve as a core holding for income, especially if rates stabilize or dip.

Final Take

Emera's Series E Preferred Shares are a rare blend of yield, safety, and valuation upside. While not immune to rate-driven volatility, their discount to liquidation preference and Emera's rock-solid credit profile make them a compelling choice. For investors prioritizing dividend sustainability and capital preservation, EMA.PRE.CA deserves a serious look.

Action to Take: Consider adding EMA.PRE.CA to a portfolio seeking high income, particularly with a 3-5 year horizon. Monitor Emera's credit metrics and interest rate trends for further entry points.