2 Cheap Utilities And A Way To Play Them

Includes: ED, SO
by: Julius Ferraro

While most of the large cap dividend payers have become overvalued and filled with people looking for income and bond alternatives, some have come back down to earth. Within the utility space I believe Con Edison (NYSE:ED) and The Southern Company (NYSE:SO) are both once again trading at levels that would provide a good return and margin of safety. In addition the electricity business is extremely stable and the stocks should hold up well on any selloff as they are considered safe havens.

Con Edison has a near monopoly on New York City and has the added benefit of only being a toll road for providing users electricity which is almost 75% of their business. They are expected to earn $3.75 per share this year giving them a p/e ratio of 14.8. I would consider this p/e to be a fair price to pay for a stable dividend grower with a predictable business. At current prices the dividend is 4.5%. In addition Con Edison has raised its dividend 39 years in a row and has only a 66% so it still has room to grow. Its balance sheet is great for utility with $1.15 billion in cash and $12.4 billion in debt.

The Southern Company is another other large cap utility stock I consider to be cheap compared to the rest of the utility space. Shares are trading at a discount because of a project that is currently costing them more than originally estimated. I would take advantage of this situation by purchasing shares at $40. Southern Company trades at 15.4 times earnings and is expected to earn $2.75 for fiscal year 13'. At current prices they have a dividend of 4.9% and a payout ratio of 75%. They have raised their dividend for 12 consecutive years. The balance sheet is perfectly fine for a company of this size ($34 billion) and a stable and predictable business. The company has $424 million in cash and $23.6 billion in debt.

For investors looking to buy stocks I recommend doing so by selling at the money puts. I have sold the Con Edison January 14' $55 put for $2.10 (3.8%) and the Southern Company January 14' $40 strike put for $1.02 (2.55%). This strategy will allow you to capture more than the dividend that is to be paid before the expiration date. Sellers of these puts must agree to purchase 100 shares of the stock at the given strike price.

Disclosure: I am long SO, ED. 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.

Additional disclosure: I am long SO and ED through puts sold