2 Top M/Y Utilities Dogs See 40.36% And 12.24% Upsides In June

Includes: AT, TAC
by: Fredrik Arnold

Results from the Morningstar/YChart (M/Y) utilities sector tallied as of market close June 28 compared with analyst mean target gain results one year hence featured Atlantic Power Company (NYSE:AT), a Boston-headquartered independent utilities industry firm, showing 40.36% price upside. It was followed by TransAlta Corporation (NYSE:TAC), a Calgary, Canada, independent utility that displayed 12.24% upside.

The chart above uses one-year mean target prices set by brokerage analysts matched against June 28 closing prices to compare 10 sector stocks, showing the highest upside price potential into 2014 out of 20 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were considered optimal for a valid mean target price estimate. This report series started applying dog dividend methodology in February prompted by Seeking Alpha reader requests. It complemented reports of possible dividend-yield-based buy opportunities from eight major market sectors as listed by Yahoo Finance posted since the fall of 2011.

So, responding to both the Seeking Alpha reader request and Ycharts.com migration to an 11 sector list, this report series provided three actionable conclusions about the highest yield (dividend/price) stocks from the Morningstar/YCharts (M/Y) sectors: basic materials, communication services, consumer cyclical, consumer defensive, energy, financial services, healthcare, industrials, real estate, technology, and utilities.

Below the author compared Dow dividend dog theory picks exhibiting the highest yield (dividend/price) from Yahoo sectors with one-year mean target price estimates reported from broker analysts.

Note the Arnold M/Y Utes selections for May/June:

Dog Metrics Turned Up Brightest M/Y Utilities

The brightest 10 utilities sector stocks showing the biggest dividend yields as of June 28 represented four M/Y industries: gas, diversified, independent, and electric power producers. Top dog Just Energy Group (NYSE:JE) was one of four diversified utilities firms. The other diversified utilities -- GDF Suez (GDFZY.PK), RWE AG (OTCPK:RWEOY), and PVR Partners (NYSE:PVR) -- placed fourth, eighth, and tenth, respectively. Second place went to AES Tiete (OTCPK:AESAY), one of four independent power producers. The other independents were slotted in third, seventh, and ninth places, respectively: Atlantic Power Corporation, CESP-Cia Energetica de Sao Paulo (OTCPK:CSQSY), and TransAlta Corporation. The lone electric utility, Centrais Eletricas Brasileiras (NYSE:EBR), was fifth. The only gas firm Niska Gas Storage Partners (NYSE:NKA) placed sixth and completed the top 10 brightest yielding M/Y utilities dog list for May/June.

Dividend Vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top 10 M/Y utilities dogs by yield as of the market close June 28, 2013, compared to those of the Dow. Historic projected annual dividend history from $1,000 invested in each of the 10 highest-yielding stocks and the total single share prices of those 10 stocks created the data points shown in green for price and blue for dividend.

Click to enlarge

Actionable Conclusion 1): M/Y Utilities Dogs Ran From Bears as Dow Stayed Bullish

The May/June M/Y utilities collection of dividend payers initiated a bearish price course as aggregate single share price dropped 32.6% since April. Dividends from $1K invested in each of the top 10 M/Y utilities stocks jumped up at a rate of 7.7% last month.

For the Dow dogs, meanwhile, projected annual dividends from $1K invested in each of the top 10 dropped over 2.2% since April, while aggregate single share price popped up over 13.6%. The Dow dogs bull run increased their overbought condition as aggregate single share price of the 10 exceeded projected annual dividends from $1K invested in each of the 10 by over $198, or 53%.

Since sector dogs are not the blue-chip, high-quality equivalents of the Dow list, an additional gauge of upside potential was added to the simple high-yield metric used to flush out initial bargains.

Actionable Conclusion 2): Wall Street Wizard Wisdom Was Weighed to Mark 9.48% Net Gain From Top 20 Dogs Come 2014

Top 20 dogs for the M/Y utilities sector were graphed below to show relative strengths by dividend and price as of June 28, 2013, and those projected by analyst mean price target estimates to the same date in 2014. A hypothetical $1,000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock upsides to 2014.

Historic prices and actual dividends paid from $1,000 invested in the 10 highest-yielding stocks and the aggregate single share prices of those 20 stocks divided by two created the data points for 2013. Projections based on estimated increases in dividend amounts from $1,000 invested in the 20 highest-yielding stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by two created the 2014 data points green for price and blue for dividends.

Click to enlarge images.

Click to enlarge

Yahoo projected a 1.85% lower dividend from $10K invested in this group while aggregate single share price was projected to increase by 0.5% in the coming year. The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would mimic moves of the market. Less than 1 showed lower volatility. Greater than 1 showed higher.

Actionable Conclusion 3): Analysts Forecast Two M/Y Utilities DiviDogs to Net 12.24% and 40.36% by June 2014

Two probable profit-generating trades revealed by Yahoo Finance for 2014 were:

Click to enlarge

Atlantic Power Corporation netted $480.00 based on dividends plus mean target price estimate from three analysts less broker fees, while TransAlta Corporation netted $183.79 based on estimates from five analysts plus dividends less broker fees.

The average net gain in dividend and price was over 33% on $1K invested in each of these two dogs. The stocks listed above were suggested only as decent starting points for your M/Y sector dividend stock purchase research process. These were not recommendations.

Disclosure: I am long AT, DD, GE, INTC, JNJ, MCD, T, VZ, PFE. 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.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.