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Worried about sequestration? Looking for a segment of the market that has a low correlation with discretionary spending? Investing in the utility industry could be the solution. Utility companies have relatively stable revenues and predictable costs, which make them ideal to invest in when the economy is uncertain. Sequestration threatens to reduce the paychecks of millions of Americans but they all will still try to make their utility payments.

In the past year, utility companies have appreciated less than three percent so profitable opportunities abound. Not only do many utility companies present attractive capital gains prospects, they pay above-average dividends that put cash in your pocket right now. When investing in utilities it is critical to focus on geography and the customer base. Companies with operations in relatively stable climates are generally more advantageous. Furthermore, if the consumer base is large, the company can benefit from economies of scale.

For details of the strategy and my screener details, please consult my methodology on the topic (last modified 1/21/2013). In brief, the screen focuses on relative stable equities with a concentration on liquid companies at affordable valuations. This is summarized below:

  • Dividend Yield ≥ 4.0%
  • Ex-Dividend Date = Next Week
  • Market Capitalization ≥ $1B
  • P/E Ratio: 0-20
  • Institutional Ownership ≥ 15%
  • Ideally Modest YTD S&P 500 Underperformance
  • Minimal European Exposure
  • Utility Company

After applying this screen, I arrived at the utilities discussed below. Depending on your belief in the investment hypothesis, you may decide to hold long enough for the dividend or to hold for long-term. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before making an investment decision. My goal is to present new companies to you and provide a brief overview of their recent developments; this should not be considered a substitute for your own due diligence.

Pepco Holdings, Inc. (POM): 5.26% Yield; Ex-Dividend 3/7

Geography: Northeast United States (Maryland and Washington DC)

Customers: 800,000

Firm Specific News:

Financial Performance and Metrics: Source - (Finviz.com)

  • Forward P/E: 16.69
  • Book Value: $19.40
  • Price/Book: 1.05
  • Debt/Equity: 1.22
  • Revenue Growth/(Contraction) (QoQ): (10.44%)
  • EPS Growth/(Contraction) (YoY): 85.39%
  • Payout Ratio: 92.8%

Dividend History ($0.27 per share quarterly): The dividend has remained static for the past year and increases are unlikely given the high payout ratio.

Pepco offers the highest utility company yield this week but is trading at its 52-week high. 2012 earnings were strong but the declining revenue is disconcerting. I would prefer to buy around book value but Pepco is an average dividend opportunity.

PPL Corporation (PPL): 4.77% Yield; Ex-Dividend 3/6

Geography: United Kingdom and Eastern United States (Pennsylvania, Kentucky, Virginia, and Tennessee)

Customers: 10 million (7.8M in the United Kingdom)

Firm Specific News:

Financial Performance and Metrics:

  • Forward P/E: 14.20
  • Book Value: $18.01
  • Price/Book: 1.71
  • Debt/Equity: 1.92
  • Revenue Growth/(Contraction) (QoQ): (23.61%)
  • EPS Growth/(Contraction) (YoY): (2.41%)
  • Payout Ratio: 54.82%

Dividend History ($.3675 per share quarterly): Historically the dividend has increased once per year and the payment recently increased by two percent for 2013. Despite the low payout ratio, management has been very conservative with the dividend and I do not foresee that changing.

PPL looks cheap at a 14 forward multiple but it rests on a weak financial position. Liquidity is subpar with a current ratio below 1.0 and the debt ratios are alarmingly high. The price-to-book ratio is pricey for a utility company, especially one that is facing declining revenue. Book value is subject to accounting policies but in general, a low book value indicates older infrastructure that could require costly maintenance/replacement. The only bright spot for PPL is that it is reducing its reliance on energy generation and expects 85% of earnings in 2013 will be derived from its regulated business.

UIL Holdings Corp (UIL): 4.39% Yield; Ex-Dividend 3/7

Geography: Northeast United States (Connecticut and Massachusetts)

Customers: 700,000

Firm Specific News:

Financial Performance and Metrics:

  • Forward P/E: 16.26
  • Book Value: $21.90
  • Price/Book: 1.80
  • Debt/Equity: 1.63
  • Revenue Growth/(Contraction) (QoQ): 0.74%
  • EPS Growth (YoY): 28.80%
  • Payout Ratio: 91.27%

Dividend History ($.42 per share quarterly): UIL has held its payment constant since early 2009 and there is no indication that it will be increased.

UIL Holdings is a middle-of-the-pack utility company in almost all ways. The stock has jumped 13.5% in the past six months as it is a rare utility company exhibiting signs of growth but the financial position is lackluster and it is difficult to get excited about this name. Having said that, you can make money with the right sleepy utility company so more research is necessary.

Public Service Enterprise Group Inc. (PEG): 4.38% Yield; Ex-Dividend 3/6

Geography: Northeast United States (New Jersey)

Customers: 4 million

Firm Specific News:

Financial Performance and Metrics:

  • Forward P/E: 14.10
  • Book Value: $21.36
  • Price/Book: 1.54
  • Debt/Equity: N/A
  • Revenue Growth/(Contraction) (QoQ): (8.73%)
  • EPS Growth/(Contraction) (YoY): (9.4%)
  • Payout Ratio: N/A

Dividend History ($.36 per share quarterly): Similar to PPL, the dividend has exhibited slight growth but any increases have generally been in-line with inflation. Management hinted that the dividend is "positioned for future growth"; however, I believe significant growth is unlikely in the aftermath of Hurricane Sandy

(click to enlarge)

(Source: PEG 2012 Results)

Public Service Enterprise Group is facing a very challenging time. The stock dropped significantly in the aftermath of Hurricane Sandy but has recovered all of its losses and is up 11% in the past quarter. I believe the company will continue to spend on infrastructure and improving operations to protect its contract with LIPA; therefore, it is difficult to predict how the stock will perform in the near-term. 2013 guidance indicates that operations should return to normal but I doubt that PEG has more than ten percent of upside in 2013.

Westar Energy Inc (WR): 4.31% Yield; Ex-Dividend 3/7

Geography: Central United States (Kansas)

Customers: 700,000

Firm Specific News:

Financial Performance and Metrics:

  • Forward P/E: 15.46
  • Book Value: $22.84
  • Price/Book: 1.38
  • Debt/Equity: 1.14
  • Revenue Growth/(Contraction) (QoQ): 2.6%
  • EPS Growth/(Contraction) (YoY): 7.29%
  • Payout Ratio: 67.59%

Dividend History ($.34 per share quarterly): Westar's dividend payments have been volatile throughout the years and commonly fluctuate by a few percentage points. This is uncommon for utility companies so it is important to monitor the payout closely.

Westar is much smaller than other utility companies going ex-dividend this week but it has a relatively strong financial position. The slight revenue increase might not look like much but it is notable in an industry that is struggling to grow the top-line. Slow and steady can win the race in the utility space.

SCANA Corporation (SCG): 4.14% Yield; Ex-Dividend 3/7

Geography: Southern United States (The Carolinas and Georgia)

Customers: 1 million

Firm Specific News:

Financial Performance and Metrics:

  • Forward P/E: 14.26
  • Book Value: $31.14
  • Price/Book: 1.58
  • Debt/Equity: N/A
  • Revenue Growth/(Contraction) (QoQ): 8.4%
  • EPS Growth/(Contraction) (YoY): 6%
  • Payout Ratio: N/A

Dividend History ($.5075 per share quarterly): The dividend was recently hiked 2.5% but has historically tracked inflation like many of the other companies presented this week. SCANA is a solid utility with adequate performance but is slightly overvalued. A dividend capture can work here but I would be more confident around $47.50.

The information presented has been summarized below. I make no guarantees regarding the information in the chart as industry classifications are frequently imperfect. Orange and green represent "avoid" and "consider" classifications, respectively.

(click to enlarge)

Please refer to profile page for disclaimers.

Source: 6 High Yield Utilities Going Ex-Dividend This Week