By Serkan Unal
Investments in utility stocks are generally considered defensive and recession-proof. This is so because utilities are the least sensitive to economic cycles, as they boast fairly stable revenue and cash flow streams, low operational risk, and the inelastic demand for utility services. Moreover, investments in utility stocks are less volatile than the broader market, which means fewer fluctuations during tumultuous times. In the current low-yield environment, dividend-paying utility stocks represent especially attractive investment choices. In fact, there are a quite a few high-yield utility stocks that pay dividend yields in excess of those of the broader market and other industry sectors.
The Mergent's U.S. Broad Dividend Achievers Index consists of several high-yielding equity investments in the utility sector. The index per se consists of stocks with a history of increasing dividends for at least ten years. Furthermore, to be included in the index, all index constituents need to have a daily trading turnover of at least $500,000. The utility-sector plays in the Index represent different service segments, including electricity, water, and gas. Here is a quick look at five promising dividend plays for yield-seeking investors.
Southern Company (SO) is a $37-billion electric utility company that serves retail and wholesale customers in the southeast United States. The company has raised dividends for 11 consecutive years. Its current dividend yield is 4.6% and its payout ratio is 77%. Southern Company's peers Entergy Corporation (ETR) and NextEra Energy, Inc. (NEE) pay dividend yields of 5.1% and 3.6%, respectively. Over the past five years, the electric utility company's dividend and EPS grew at average rates of 4.0% and 3.9% per year, respectively. The company's EPS is forecast to grow 5.2% per year for the next five years. The company has seen consistent growth in its net income and EPS, rising profit margins, and good cash flow from operations. Southern Company has a strong ROE of 12.3% and return on invested capital [ROIC] of 6.0%. In terms of valuation, the stock is pricier than some of its competitors. It has a forward P/E of 15.5x, compared to 12.1x for Entergy and 13.7x for NextEra Energy. The stock is popular with Louis Navellier and Cliff Asness.
SCANA Corp. (SCG) is a $6-billion electric utility company that sells power to retail and wholesale customers in South Carolina. This company has increased dividends for 12 years in a row. Scana Corp. has boosted its dividend at an average rate of 2.5% per year over the past five years. Over the same period, its EPS expanded at the same average annual rate. The company pays a dividend yield of 4.3%. Its payout ratio is 64%. Its peer Duke Energy Corporation (DUK) pays a dividend yield of 4.9%, while competitor Dominion Resources (D) pays a dividend yield of 4.3%. Analysts forecast that the company's EPS will expand at an accelerated rate of 5.0% per year for the next five years. With this rate of growth, dividends are likely to continue receiving a boost in the coming years. Scana Corp.'s ROE is 10% and its ROIC is 4.6%. The stock is trading at a forward P/E of 14.2, which compares to competitor Dominion Resources' ratio of 15.2x and Duke Energy's of 14.4x. Fund manager David Harding is bullish about this company.
Vectren Corp. (VVC) is a $2.3-billion diversified utility company that provides natural gas and electric power to customers in Indiana and west central Ohio. It pays a dividend yield of 5.0%. Its payout ratio is 71%. The company has increased dividends every year for the past 53 years. Competitor American Electric Power Co., Inc. (AEP) pays a dividend yield of 4.5%, while NiSource Inc. (NI) pays a dividend yielding 4.0%. Over the past half decade, Vectren increased dividends and EPS at average annual rates of 2.1% and 3.9%, respectively. The utility's EPS is forecast to increase at a rate of 5.0% per year for the next five years. The company's ROE is 10.8% and ROIC is 5.5%. In terms of valuation, the stock has a forward P/E of 15.3x. Competitors American Electric Power and NiSource have forward P/Es of 13.3x and 15.6x, respectively. Among fund managers, the stock is popular with value investor David Dreman.
Atmos Energy Corporation (ATO) is a $3-billion natural gas utility engaged in distribution, transmission, and storage of natural gas in twelve U.S. states, including Texas, Kentucky, Louisiana, Mississippi, Colorado, Kansas, Tennessee, Georgia, Illinois, Iowa, Missouri, and Virginia. It is the largest gas utility company in the United States. The company has raised dividends for the past 25 years. The stock pays a dividend yield of 4.0% on a payout ratio of 61%. Competitors ONEOK Inc. (OKE) and AGL Resources (GAS) pay dividend yields of 2.9% and 4.8%, respectively. Over the past five years, Atmos Energy's dividend and EPS grew at average annual rates of 1.5% and 1.9%, respectively. The company's EPS is forecast to rise at a faster rate of 5.5% per year for the next five years. The stock has a ROE of 9.0% and ROIC of 5.0%. The stock is trading at a forward P/E of 13.9x, which compares to 23.2x for ONEOK and 13.6x for AGL Resources. Billionaires D. E. Shaw and Ken Griffin hold small stakes in this stock.
UNS Energy Corporation (UNS) is a $1.7-billion electric utility serving customers in southeastern Arizona. The company has raised dividends for the past twelve years. Its dividend is currently yielding 4.1% on a payout ratio of 76%. Its competitors Pinnacle West Capital Corporation (PNW) and PNM Resources, Inc. (PNM) are yielding 4.4% and 2.8%, respectively. Over the past five years, the company's dividend and EPS grew at average annual rates of 14% and 8.3%, respectively. Analysts forecast that the company's EPS will increase at an average rate of 8.0% per year for the next five years. Despite a relatively strong EPS growth forecast for the future, investors should not expect dividend boosts as large as those over the past five years, on average. The company has a ROE is 8.5% and ROIC is 3.2%. The stock has a forward P/E of 15.6x. Its rivals PNW and PNM have forward P/Es of 13.9x and 14.9x, respectively. The stock is not currently attractive to major hedge fund managers.