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Are you looking for profitable dividend stocks in the utilities sector but would like to stay cautious in your picks? If so, we created a screen that might interest you.

As a starting point, we provide a list of utility stocks that are outperforming their industry peers based on three metrics: Trailing twelve month (TTM) gross, operating, and pretax margins.

We then moved to looking at growth in quarterly revenue slower than growth in quarterly inventory year-over-year. We also looked for companies with quarterly inventory increasing as a percent of current assets.

When revenue is growing slower than inventory, it may indicate that the company is having trouble selling its inventory - although this might just indicate inventory building or a change in sales policies.

Finally, we looked for those stocks that were paying a dividend of less than 5%. This allowed us to stay away from high yield stocks.

We were left with 3 companies on our list.

A Closer Look

We looked at Pinnacle West Capital Corporation (PNW) in more detail. The company's stock trades around $54.34, close to its 52-week high of $54.78, up 18% in the past 1-year. Pinnacle West trades with a P/E multiple of 16 times versus the industry average of 15.5x. The stock pays a dividend of 4%. Dividend growth in the past 5 years has been flat. We would like to point out that its competitor Duke Energy (DUK) trades with a P/E multiple of 15.6 times, and pays a dividend of 4.5%. Unlike Pinnacle West, Duke Energy's 5-year dividend growth is at 3.5%. Also, do keep in mind that an additional equity raise for financing needs could add pressure on Pinnacle's stock.

Where would you invest your capital?

The List

Interactive Chart: Press Play to compare changes in the 1-year return over the last two years for the three stocks mentioned below.

Do you think troubling inventory trends could overturn the profitability, and dividend payout of these companies? Use the list below as a starting point for your detailed analysis:

1. Pinnacle West Capital Corporation : Provides retail and wholesale electric services primarily in the State of Arizona.

  • Market cap at $5.95B, most recent closing price at $54.34.
  • TTM gross margin at 37.78% vs. industry average at 28.77%. TTM operating margin at 25.31% vs. industry average at 18.51%. TTM pretax margin at 19.23% vs. industry average at 12.7%.
  • Revenue grew by -1.37% during the most recent quarter ($1,109.47M vs. $1,124.84M y/y). Inventory grew by 9.51% during the same time period ($250.26M vs. $228.52M y/y). Inventory, as a percentage of current assets, increased from 14.36% to 22.77% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Dividend yield at 4%.

2. SCANA Corp. (SCG): Engages in the generation, transmission, distribution, and sale of electricity to retail and wholesale customers in South Carolina.

  • Market cap at $6.24B, most recent closing price at $47.92.
  • TTM gross margin at 29.57% vs. industry average at 23.95%. TTM operating margin at 20.91% vs. industry average at 15.3%. TTM pretax margin at 14.5% vs. industry average at 9.24%.
  • Revenue grew by -4.95% during the most recent quarter ($1,038M vs. $1,092M y/y). Inventory grew by 7.58% during the same time period ($440M vs. $409M y/y). Inventory, as a percentage of current assets, increased from 28.78% to 32.33% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Dividend yield at 4.13%.

3. Southern Company (SO): Operates as a utility company that provides electric service in the southeastern United States.

  • Market cap at $38.38B, most recent closing price at $44.11.
  • TTM gross margin at 37.68% vs. industry average at 28.77%. TTM operating margin at 26.87% vs. industry average at 18.51%. TTM pretax margin at 22.67% vs. industry average at 12.7%.
  • Revenue grew by -6.98% during the most recent quarter ($5,049M vs. $5,428M y/y). Inventory grew by 31.09% during the same time period ($2,530M vs. $1,930M y/y). Inventory, as a percentage of current assets, increased from 29.72% to 37.78% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • Dividend yield at 4.5%.

*Profitability data sourced from Fidelity, all other data sourced from Finviz.

Source: 3 Profitable Utility Stocks With Troubling Inventory Turnover