By Serkan Unal
Recently, we wrote about investment opportunities in high-yield utility stocks that are constituents of the The Mergent's U.S. Broad Dividend Achievers Index, representing the U.S.-based stocks with a history of increasing dividends for at least ten consecutive years. The Dividend Achievers, including the featured utility stocks, are those stocks with proven earnings power and consistent dividend growth, boasting the capacity for future capital appreciation.
Among the Index constituents are several defensive utility stocks, with high dividend yields and proven dividend growth, that represent excellent investments for strong income in the current economically-volatile and low-yield environments. In this second article about Dividend Achievers among utility stocks, we focus on five players with dividend yields in the range between 3.5% and 4.3% and five-year annual dividend growth averaging between 0.9% and 8.0%. All these could make good additions to prudent income portfolios.
Consolidated Edison (ED), one of the oldest companies trading in the markets today, is a $16.4-billion electric utility company that serves retail and wholesale customers mainly in the metropolitan New York and parts of New Jersey and Pennsylvania. The company has paid out dividends for 127 years and has raised them for 38 consecutive years. Its dividend currently yields 4.3%, and its payout ratio is 64%. This dividend aristocrat's peers American Electric Power Co., Inc. (AEP) and Northeast Utilities (NU) pay dividend yields of 4.3% and 3.5%, respectively. Over the past five years, ConEd's EPS and dividends grew at average annual rates of 3.8% and 0.9%, respectively. The company's EPS is forecast to grow at a similar annual rate for the next five years; however, that rate will be slower than the EPS growth rates of many of its main competitors. The utility has an ROE of 9.6%. ConEd has seen damage from Hurricane Sandy, which caused the worst power outage in history whereby a million of its customers lost power. Despite this, the stock remains a good defensive play, with an exceptionally low volatility relative to the market's, boasting beta of only 0.11. In terms of valuation, the stock is cheaper than some of its main competitors. Its forward P/E is 14.7x, compared to 15.0x for the industry on average and 16.0x for Northeast Utilities. The stock is popular with RenTech's Jim Simons.
NextEra Energy, Inc. (NEE) is a $29-billion electric utility, the largest U.S. producer of clean energy from the wind and sun. It services some 9 million customers in parts of Florida. In fact, according to the company, NextEra Energy has the second largest fleet of power plants in the United States, capable of producing the electricity needed to power more than 17 million homes. This company has increased dividends for 17 consecutive years. Currently, NextEra Energy pays a dividend yield of 3.5% on a payout ratio of 47%. Its peers Southern Company (SO) and TECO Energy (TE) have higher dividend yields of 4.5% and 5.2%, respectively. Still, NextEra Energy has a strong record of dividend growth, with its payout increasing at an average annual rate of nearly 8% over the past five years. Over the same period, its EPS grew by 7.3% annually. Analysts forecast that the company's EPS will expand by 5.8% per year for the next five years. On the down side, the company does have significant debt as percentage of equity and its free cash flow seems to be under pressure in the near term. The company's ROE is 14%. Its beta is only 0.39. The stock is trading at a forward P/E of 14.1x, below the industry average and 16.0x for rival Southern Company. Value-oriented hedge fund Polaris Capital (check out its top picks) is bullish about this power utility.
Piedmont Natural Gas Co. Inc. (PNY) is a $2.3-billion natural gas utility engaged in storage and distribution of natural gas in portions of Carolinas and Tennessee. The company has raised dividends for the past 34 consecutive years. The stock pays a dividend yield of 3.8% on a payout ratio of 77%. Its competitors Dominion Resources, Inc. (D) and SCANA Corp. (SCG) pay higher dividend yields of 4.1% and 4.3%, respectively. For comparison, the largest U.S. gas distributor, Atmos Energy Corporation (ATO), pays a lower dividend yield of 3.5%. Over the past five years, Piedmont Natural Gas Co.'s EPS and dividends grew at average annual rates of 4.3% and 3.8%, respectively. The company's EPS is forecast to accelerate to a rate of 5.4% per year for the next five years. The stock has a ROE of nearly 11%. Its beta is only 0.54. However, the stock is expensive, given its forward P/E of 18.8x, above the industry average of 18.1x and Atmos Energy's ratio of 14.8x. The stock is popular with value investor Chuck Royce.
Northwest Natural Gas Company (NWN) is a small-cap gas utility company storing and distributing natural gas in Oregon, Washington, and California. This utility has raised dividends every year since 1956. It pays a dividend yield of 4.2% on a payout ratio of 81%. Its competitor Portland General Electric Company (POR) pays a dividend yield of 4.0%, while its peer Atmos Energy Corporation pays a yield of 3.5%. Over the past five years, Northwest Natural Gas Company boosted EPS and dividends at average annual rates of 0.8% and 4.5%, respectively. The utility's EPS is forecast to accelerate to a rate of 4.2% per year for the next five years. The company's ROE is 8.6%. Its beta is 0.45. As regards its valuation, the stock has a forward P/E of 17.7x, below the gas distribution industry's average of 18.1x. Portland General Electric Company's forward P/E is 14.2x. Atmos Energy Corporation, though yielding less, is much cheaper. Value investor Ken Fisher has a small stake in Northwest Natural Gas Company.
California Water Service Group (CWT) is a $750-million water utility company serving some 2 million people in California, Washington, New Mexico, and Hawaii. The company has raised dividends every year since 1968. Its dividend is currently yielding 3.5% on a payout ratio of 58%. Its competitors American States Water Company (AWR) and American Water Works Company, Inc. (AWK) are yielding less, 3.1% and 2.6%, respectively. Over the past five years, California Water Service Group's EPS and dividends grew at average annual rates of 6.1% and 1.7%, respectively. The company's EPS growth rate will average 5.0% per year for the next five years. The stock boasts an ROE of 9.8%. Its beta is low at 0.43. However, the stock is pricey based on forward P/E of 17.3x, above the water industry's ratio of 13.2x. Its rivals American States Water Company and American Water Works Company have similar forward P/Es of 17.0x and 16.9x, respectively. Among fund managers, billionaire Ken Griffin from Citadel Investment Group holds a minor stake in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.