In the past few years, the utility service industry has undergone heavy deregulation making it easier for new entrants to operate alongside existing players. Fluctuation in the commodity prices and increased competition makes the industry more volatile. As the industry undergoes a transformation there are attractive investments in the sector with solid dividends.
Duke Energy is the largest regulated utility company with its headquarters in North Carolina. The company reports its operations based on six segments, namely, Duke Energy Carolinas, Carolina Power & Light Company, Florida Power Corporation, Duke Energy Ohio, and Duke Energy Indiana and International Energy. The company gained the status of the largest utility following a merger with Progress Energy. The expected cost synergies generated from the acquisition range from around 5-7% for the coming years.
Duke energy exhibited robust performance during the past three years with an average growth in revenue of about 12.5% -- growth in net income has been slightly below at 11.3%. The stock managed to outperform the Philadelphia Utility Index as well as S&P 500 index.
The energy giant commits itself to a high payout ratio of 65-70% with the dividend yield of 4.24%. Analysts expect the ratio to improve by the end of 2013. The current annual dividend is $3.06 per share, of which $1.75 billion was paid out in cash in 2012.
Duke does face several challenges as it competes in a highly volatile industry with changing commodity prices. The management has been able to maintain its lucrative payout ratio and has a low leverage ratio of 0.9.
The liquidity position of the company seems to show an improving trend with an improvement in cash flows; however, an increase in capital expenditure has caused the free cash flows of the company to be negative.
The company currently trades at a P/E ratio of 22 and a forward P/E ratio of 14. Furthermore, the P/B and P/S ratio stand at 1.2 and 2.1, respectively.
Exelon operates in the utility service industry involved in the generation and provision of energy in three broad locations namely Maryland, northern Illinois, and southeastern Pennsylvania. Earnings are reported in four core segments under the following categories: Generation, ComEd, PECO and BGE.
The company underperformed the S&P500 index; nonetheless, it came out relatively unscathed by the economic crisis as compared with its peers. The average revenue growth over the past three years amounted to 8.6%. However, growth in net income did not follow the revenue figure and showed an average decline of 18.10%, mainly attributed to the losses reported in the BGE segment.
The management continues to face a trade-off between reinvestment of earnings and paying out dividends. The company dedicates itself to its target CAPR and maintains a payout ratio of 67%. The current dividend yield amounts to 3.41% with quarterly dividends of $0.3 per share.
The free cash flows of the company show a decline of 60% mainly due to an increase in capital expenditure and decline in earnings. The management has been able to generate positive cash flows by taking a conservative approach in paying out dividends.
The current P/E ratio and the forward P/E ratio stand at 37.3 and 13.2, respectively. In addition, the P/B and P/S ratio amounted to 1.4 and 1.2, respectively.
Pioneer South West
Pioneer Southwest Energy Partners is a venture undertaken by Pioneer Natural Resources Company to explore and develop oil and natural gas assets in the United States. The company's operations are centered in Texas, and New Mexico.
In the last three years, Pioneer's average revenue growth has been 4.3% whilst the industry average was -2.6%. The company is not subject to federal income tax at entity level giving it a cost advantage over its competitors.
The yield for PSE is 6.47%, and the partnership distributes $2.08 per share annually to its shareholders. Annual distributions are backed by strong EPS and operating cash flows.
The low leverage ratio of 0.6 provides the company with financial flexibility to pursue growth and dividend policies. There has been a substantial decline in free cash flows of the partnership due to an increase in the capital expenditures. Current free cash flows stand at -$34 million.
The current and forward P/E ratio stands at 10.2 and 10.3. The P/B and P/S ratio both stand at 4.3 and 5.5 correspondingly.
Despite competitive pressure, these energy giants remain attractive dividend investments. Duke has become the biggest utility company and cost synergies will allow the company to maintain its dividends. On the other hand, Exelon's current dividends are manageable after the dividend cut. Finally, PSE is one of the highest-yielding energy partnerships, and the current distributions are extremely attractive. All of the three options will be attractive to income-hunting investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.