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Treasury yields have been trending downwards since the 2007 market crash and currently treasury yields are at their historic lows. In this low yield environment, the utility sector offers high yield. The utility sector ETF (NYSEARCA:XLU) has a dividend yield of 4.1%, and has remained popular among income seeking investors. In this article I will comment on three high yield utility stocks. The three stocks are PPL Corp (NYSE:PPL) 5%, Southern Company (NYSE:SO) 4.6% and Duke Energy (NYSE:DUK) 4.7%. These three stocks offer safe yields, have increased dividends at a decent pace in the past, have solid dividend histories and hold investment grade credit ratings or above.

The utility sector underperformed the S&P 500 in 2012. However, in the last 13 years, the utility sector has outperformed the broad market eight times. Given current low treasury yields, I believe investors will chase the utility sector for yield in 2013. The following chart shows 10 year treasury yields for the last several years.

(click to enlarge)
Source: learnbonds.com

PPL Corp
PPL Corp offers the highest dividend yield of 5% amongst its peers. PPL has increased its dividends at a decent pace in the last four years. Also, payout ratio for the company has remained at a low level and the ratio stood at 51% in 2011. Moreover, other than earnings growth, the company can increase its dividend by expanding its payout ratio. In the past, the company had decent dividend coverage ratio, which indicates stability in its dividend payments.

Capital spending (MUTF:CAPEX) has remained a significant portion of cash out flow for the utility companies. PPL has been able to keep its CAPEX at a moderate level. In the last four years, CAPEX as percentage of sales remained in the range of 16% - 19%. The company has a debt to equity ratio of 175% and holds a "BBB" credit rating assigned by S&P.

The chart and table below show growing annual dividends, cash flows and some dividend stats.

(Throughout this article dividend coverage is calculated by following formula = CFO/Dividends)

(click to enlarge)

2008

2009

2010

2011

Annual Dividend per share

$1.34

$1.38

$1.40

$1.44

Payout Ratio

55%

-

63%

51%

Dividend Coverage

3.2x

3.6x

3.6x

3.3x

Capex as % of Sales

17%

16%

18%

19%

Source: Annual Financial Statements

Southern Company
Southern Company is amongst the largest utility companies in the U.S. The company offers an attractive combination of dividend yield and growth, as it currently offers a yield of 4.6% and analysts are expecting 5% growth rate per annum for the next five years. The company has increased its annual dividends at a decent rate of 4% in the last three years. Also, the company has boasted strong dividend coverage ratio in recent years which, coupled with its strong dividend history of 65 years, indicates dividend sustainability for the company. Furthermore, the company has a strong balance sheet evident by its "A" credit rating assigned by Fitch.

According to the company's earnings guidance it is expected to earn $2.58 - $2.70 per share for fiscal year 2012, translating into 5% - 7% earnings growth YoY.

The chart and table below shows growing annual dividends, cash flow and selected dividend stats.

(click to enlarge)

2008

2009

2010

2011

Annual Dividend per share

$1.66

$1.73

$1.80

$1.87

Payout Ratio

70%

75%

76%

73%

Dividend Coverage

2.7x

2.4x

2.65x

3.7x

Capex as % of Sales

23%

30%

23%

25%

Source: Annual Financial Statements

Duke Energy

DUK is a leading utility company of the U.S. and offers investors a high dividend yield of 4.7%. The company has increased its annual dividends from $2.76 in 2008 to $3.06 in 2012. The company had a dividend coverage ratio of more than 2.7x in the last four years which indicates that the company did not face cash flow issues to cover its dividend payments. Also, the company has a strong dividend history, as it has never missed a quarterly dividend in the last 344 quarters, which indicates it is highly unlikely to miss dividends in the future as well.

The company has a strong balance sheet, and holds a "BBB+" credit rating assigned by S&P. Also, the company has the lowest debt to equity ratio of 95% among its peers.

The chart and table below shows growing annual dividend, cash flow and dividend stats.

(click to enlarge)

2008

2009

2010

2011

Annual Dividend per share

$2.76

$2.88

$2.94

$3

Payout Ratio

89%

-

95%

75%

Dividend Coverage

2.9x

2.85x

3.5x

2.7x

Capex as % of Sales

33%

33%

33.5%

30%

Source: Annual Financial Statements

Source: 3 High-Yield Utility Stocks To Buy For 2013