5 Underrated Dividend Plays On Utility

Includes: CNP, OGE, OKE, PCG, SRE
by: Activist Stocks

Utilities have historically been a great place to find safe, low-volatility dividends, however, we have found five stocks with that same "safeness", but also access to a potentially rapid growth energy market, natural gas. Natural gas as a fundamental fuel should continue to gain traction in the near future. IEA expects natural gas production to be up over the next couple of years (check out five reasons to buy utilities now).

CenterPoint Energy, Inc. (NYSE:CNP) is a public utility company with operations engaging in electric transmission in the Texas Gulf Coast area. This includes its subsidiary CERC, which owns and operates natural gas distribution systems in six states.

  • The company pays a 3.5% dividend yield on a 83% payout of earnings, with a beta of 0.6.

CenterPoint Energy has a portfolio of electric and natural gas businesses, with stable regulated operations and ongoing infrastructure development projects that should drive the company higher in the future, Not to mention its somewhat diversified geographical presence, spread across six states. CenterPoint plans to spend around $6.8 billion between 2013 and 2017 to upgrade its electricity and natural gas distribution system.

Its current regulated electric power operations and gas distribution utilities generate a relatively stable and growing earnings stream, which is positive for continuing to fund its dividend. The company continued to be a strong cash generator in 2012 with operating cash flow close to $1.9 billion. Its balance sheet is also strong, with total debt of approximately $8.4 billion is in the form of fixed rate instruments with no major maturity due in the near-term. Also the company had a cumulative and largely unutilized credit facility of approximately $2.5 billion.

OGE Energy Corp. (NYSE:OGE) offers physical delivery for both electricity and natural gas in south central United States, operating in the segments of electric utility and natural gas transport and storage.

  • OGE pays a 2.5% dividend yield, with only a 43% payout of earnings. Meanwhile, its beta is 0.7.

OGE Energy remains the largest electric utility in Oklahoma with well-positioned regulated utility and unregulated midstream gas businesses. OGE Energy operates in Oklahoma, where unemployment is significantly lower than the national average. The resilience in the economy of its service area bodes well for the company.

Recent news for CenterPoint (first company mentioned) and OGE includes the fact that the two are combining pipeline assets to create a master limited partnership. OGE is putting up its Enogex midstream assets, while CenterPoint is offering pipelines and field services. Combined assets include more than 8,400 miles of interstate pipelines with almost 9 billion cubic feet of transport capacity and another 2,300 miles of intrastate pipelines.

Back to OGE, the company has a bias towards fixed-fee revenues in its unregulated natural gas business, while also having midstream assets located in areas that will benefit from strong growth in gas production in Oklahoma, and the Texas panhandle. Recent investments are expected to help the company meet its 5% to 7% long-term EPS growth target.

  • ONEOK, Inc. (NYSE:OKE) is a diversified energy company engaged in all aspects of the natural gas business. The dividend yield is at 3.2%, but its payout on earning is 93%. Although the company is one of the largest publicly traded master limited partnerships, it also has the highest beta of our five stocks listed at 1.1.

ONEOK is the largest natural gas distributor in Oklahoma and Kansas and the third largest natural gas distributor in Texas, providing service as a regulated public utility to wholesale and retail customers.

The company plans to invest some $3 billion in 2013 for the build out of new natural gas gathering and processing facilities in the Williston Basin and Cana-Woodford Shale areas, and installing extra pump stations on the Bakken NGL pipeline, which should be key projects for driving growth.

ONEOK Partners (NYSE:OKS) is its primary growth vehicle, with notable scale and financial strength. Through this segment, the company focuses on maintaining stable cash flows and earnings, predominantly from fee-based income and by managing commodity price and spread risk.

ONEOK has a 43% interest in ONEOK Partners, which also accounts for 80% of its operating profits, while its utility and non-utility operations account for the other 20%. ONEOK Partners gathers and processes natural gas and NGLs, and ONEOK Inc.'s utility network services more than 2 million natural gas utility customers in Oklahoma, Kansas, and Texas. Although ONEOK's dividend yield is below the other major companies, it could offer the best growth prospects given its robust exposure to the natural gas industry via ONEOK Partners.

Sempra Energy (NYSE:SRE) has quite an insulated business given its diverse operations, and it is one of three energy companies with large upside (see all three).

  • The company pays a 3.2% dividend yield on a 67% payout of earnings. The company also has a 0.5 beta.

Sempra is a southern California-based energy services holding company involved in the sale and distribution of electricity and natural gas. The future growth for the company should be supported by stable utility earnings and progress at its LNG terminals (see what happens if Japan freezes LNG imports).

Sempra's move to streamline its assets more towards a regulated utility is a big positive for the company in the long term. The company plans to spend $14 billion through 2016 for capital expansion projects focused mainly on its California based utilities, and should help the company meet its 6% to 8% earnings growth target.

As for its dividend, Sempra's current dividend payout is 67%, but based on 2013 EPS estimates it is only a 56% payout. This energy services company also has an ongoing $500 million share repurchase program.

I believe I have saved the best for last; PG&E Corporation (NYSE:PCG) has a steady stream of earnings and returns, thanks to the supportive regulatory environment in California.

  • The utility has a 4.2% dividend yield, with a 95% payout ratio, and the company has the lowest of the five betas at 0.2.

What's more is that PG&E is the cheapest of the five utilities; trading at 6 times operating cash flow, compared to CenterPoint (7x), OGE (9x), ONEOK (14x) and Sempra (10x).

PG&E Corporation has a solid portfolio of regulated utility assets that offer a stable earnings base and substantial long-term growth potential. Going forward, favorable decisions from regulators, long-term supply contracts, diversification into alternative power sources and infrastructure improvement programs are the company's focus.

PG&E Corporation operates with an "authorized" return on equity of 11.35% in the regulatory progressive state of California. The California Public Utilities Commission (CPUC) provides the company with ample regulatory support through progressive mechanisms like decoupling.

Decoupling basically insulates the top line of the company from risks arising out of lower customer usage, weather vagaries and volatility in prices. This makes the company a relatively high-dividend paying stock with very little volatility thanks to unique protection by the state of California.

PG&E also has a strong balance sheet and cash flows, where at the end of the third quarter the company had a relatively low long-term debt to capitalization ratio of 48.5%.

All five of these stocks pay a dividend, while also being relatively insulated thanks to their exposure to the heavily regulated utility industry. Meanwhile, they all also have exposure to the natural gas industry. As well, all of these companies have relatively low betas (see 5 other high-dividend-low volatility stocks).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.