Nearly all publicly traded utility companies pay dividends. Among the 85 utility companies that are included in the Russell 3000 index, 83 companies pay dividends. The average annual dividend yield of these companies is 3.90% while the median is 3.74%. Ferrellgas Partners LP (NYSE:FGP) has the highest yield at 9.10%, and AES Corporation (NYSE:AES) has the lowest yield at 1.31%.
In this article, I attempt to determine which of the Russell 3000 utility companies is the most attractive for dividend-seeking investors.
I consider that aside from sporting a healthy dividend yield, low payout ratio and consistent dividend growth are the most crucial factors for dividend-seeking investors. In addition, since dividend investors try to avoid too much risk, the Sharpe ratio, which measures the ratio of reward to risk, is also extremely important.
I have screened the Russell 3000 utility companies that pay dividends according to the above-mentioned principles.
The screen's method requires that all stocks comply with the following demands:
- The payout ratio is less than 100%.
- The annual rate of dividend growth over the past five years is greater than zero.
- The forward dividend rate is equal or greater than the trailing dividend rate.
- Sharpe ratio is greater than 1.0.
Furthermore, I ranked all the stocks that complied with all the required demands according to a formula that I constructed, which gave 35% weight to the yield, 35% to the payout ratio, 20% to the dividend growth rate and 10% to the Sharpe ratio.
In order to find out how such a ranking formula would have performed during the last 14 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took the 406 Russell 3000 companies that pay dividends and comply with all the above-mentioned demands.
The back-test results are shown in the chart below. For the back-test, I divided the 406 companies into ten groups according to their ranking. The highest ranked group with the ranking score of 90-100, which is shown by the dark green column in the chart, has given by far the best return, an average annual return of almost 21%. Also, the second and the third group (scored: 80-90 and 70-80) have given superior returns. This brings me to the conclusion that my ranking system is useful.
I used the Portfolio123's powerful screener and ranking system to perform the search. All the data for this article were taken from Portfolio123. After running this screen on June 18, 2013, before the market open, I discovered 34 utility stocks, which comply with all the demands.
The table below presents the best twenty companies in the order of their rank.
The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years and the Sharpe ratio for the twenty companies.
The table below shows the most influential parameters, for dividend-seeking investors, for the seven best ranked Russell 3000 utility companies according to my criteria.
Which of the seven utility companies is the most attractive for dividend-seeking investors? It is not easy to determine.
All seven stocks look quite attractive to dividend-seeking investors due to their solid dividend yield and long-term track record of consistent and rising dividend payments. CMS Energy Corp. (NYSE:CMS) and UNS Energy Corp. (NYSE:UNS) have the highest dividend yield among the seven companies at 3.72%, but CMS has had a much higher annual rate of dividend growth over the past five years at 36.85%. NV Energy Inc. (NYSE:NVE) has a good dividend yield of 3.22%, but its PEG ratio is high at 4.73. American States Water Co. (NYSE:AWR) has a good dividend yield of 3.00%, but its earnings growth prospects are weak. American Water Works Company Inc. (NYSE:AWK) has a solid dividend yield of 2.73% and it has the highest earnings growth prospects among the seven companies. UGI Corp. (NYSE:UGI) has a solid dividend yield of 2.92%, but it has the lowest earnings growth prospects among the seven companies. IDACORP Inc. (NYSE:IDA) has a good dividend yield of 3.14%, but it has the lowest annual rate of dividend growth among the seven companies.
Considering all these factors, I can't see one stock, which is clearly superior to the others. In my opinion, a portfolio of the three stocks - CMS, AWK and UNS - should offer satisfying long-term returns to the dividend investor.
Some recent issues in my three favorite utility companies:
CMS Energy Corporation, through its subsidiaries, operates as an energy company primarily in Michigan. The company operates in three segments: Electric Utility, Gas Utility, and Enterprises.
On June 05, the company announced that its nearly $1 billion investment over the past five years is paying off for its 1.8 million customers, producing a 20 percent improvement in electric reliability. The company said that it invests about $150 million per year to upgrade and modernize its electric distribution system. This work includes inspecting and replacing poles and cross-arms; replacing transformers, insulators, and adding new electric wires. The company is also installing new automatic relay equipment and strengthening animal protection measures at substations to further improve reliability.
American Water Works Company, Inc., through its subsidiaries, provides water and wastewater services in the United States and Canada.
American Water this year improved its cash flow and leverage measures. As a result on May 27, S&P upgraded American Water and its subsidiaries, American Water Capital Corp., New Jersey American Water Co., and Pennsylvania American Water Co., from 'BBB+' to 'A-' with a stable outlook. On May 29, Moody's upgraded American Water and American Water Capital Corp., from 'Baa2' to 'Baa1, and upgraded mortgage bonds at New Jersey American Water Co. and Pennsylvania American Water Co. from 'Baa1' to 'A3,' revising outlook from positive to stable. The company said that the upgrade of AWK reflects its expectations that the company will continue to make progress towards enhancing cost recovery throughout its broad base of regulated operations, which will further improve financial metrics.
UNS Energy Corporation, through its subsidiaries, engages in the electric generation and energy delivery business.
On April 29, UNS Energy reported its first quarter 2013 earnings results:
UNS Energy's net income for the first quarter of 2013 was $11.3 million, or $0.27 per share of common stock on a fully diluted basis, compared with net income of $6.5 million, or $0.17 per diluted share in the first quarter of 2012.
UNS Energy's primary subsidiary, Tucson Electric Power Company (NYSE:TEP), reported net income of $1.5 million in the first quarter of 2013 compared with a net loss of $1.5 million in the first quarter of 2012. TEP's results benefited from cold winter weather that led to higher residential and commercial kilowatt-hour (kWh) sales. Cold winter weather also helped the results of UNS Gas, UNS Energy's gas distribution subsidiary, where net income was $7.4 million during the first quarter of 2013 compared with $5.4 million in the first quarter of 2012.
In the report, Paul Bonavia, UNS Energy's Chairman and Chief Executive Officer said:
While our first quarter financial results benefited from cold weather, we are still managing the cost pressures associated with TEP's rate freeze. Our focus continues to be operational excellence, especially as we enter the warmer months of the year when electricity demand is at its highest.
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.