Just Energy Group (NYSE:JE) is a diversified utility, founded in Canada in 1997, serving over 1.8 million customers in the U.S., Canada, and U.K. Shares are listed on both the Toronto Stock Exchange and New York Stock Exchange. Just Energy provides both residents and businesses with natural gas and electricity. Through its subsidiary National Home Services they also rent and sell high efficiency and tankless water heaters, air conditioners and furnaces to Canadian customers. Through its subsidiary Hudson Energy Solar they provide solar project development platforms operating in New Jersey, Pennsylvania and Massachusetts.
Just Energy Group is not your average utility, however. It operates in deregulated markets in direct competition to the utility companies which probably come to mind of the average investor. In deregulated markets, customers have a choice of which utilities they buy their gas and electricity from, and Just Energy is one of these companies. They compete against other local utilities on price to sign customers to any of three types of long-term contracts - fixed-price, price-protected or variable-price.
For the most part, Just Energy doesn't generate its own natural gas or electricity. Instead, Just Energy buys electricity and gas in bulk from the local producers in the area in which it operates. It then offers these services to customers in the area. Upon switching to Just Energy, customers will most likely still be getting the same services they had with their previous utilities. The difference is that by going through Just Energy they can sign fixed-price contracts to help offset the price volatility of utilities. As we all know, when demand rises and/or supply decreases in the utility world, the price we pay for those utilities increases. Customers who have a fixed-price contract with Just Energy are saved from those increases. The following image helps to explain this concept:
Just Energy also offers customers the unique ability to go 100% "green" with their utility use. They do this via the JustGreen or JustClean programs. Basically, Just Energy purchases either renewable energy credits or carbon offsets on behalf of the customer based on their usage to ensure that up to 100% of their power comes from renewable sources, or the carbon emissions from the gas used in their homes is offset. Customers who are environmentally conscious can choose the level (up to 100%) of which they wish to "go green" and the price paid for the service will adjust accordingly.
Financials and Performance
Since I first started watching JE in June of 2012, it was priced at $11/share, and shares of JE haven't really done that well for investors. Despite collecting $1.70 in dividends since that time, a yield of over 10%, adding in the decline in share price to its current level of $7.70 nets a return of -15%. That's not good considering the bullish environment the overall stock market has been in since that time. I attribute the poor performance during that time to a number of things:
- The company posted a $153.5-million loss in the first half of fiscal 2014, compared with a $351.7-million profit for the same period in fiscal 2013.
- The company cut its dividend by 30%
- The company has continued to take on debt to finance operations and pay its dividend
The company has been spending a lot of cash the past few years, not only to pay the dividend but also to grow the company and expand into new territories and markets. Not many companies start out like Just Energy has chosen to - paying a high yield while simultaneously investing lots of cash into growth. As a result, JE's payout ratio has been extremely high - over 600% last year. The last quarter showed that payout ratio to be down to 145%, and management "guaranteed" that it would be at 100% by the end of FY14. I believe that as the payout ratio continues to decline, the fundamentals of the company will show improvement.
Current ratio has been on the decline - down to 0.70 - as the debt levels have increased. Also as a result of the high amount of debt carried, the book value is in the negative - around -$2.25/share. Margins have declined across the board as has ROI.
Let's face it - the financial situation of Just Energy leaves much to be desired. But like all utilities they rely heavily on debt to finance their operations. However, I think that JE has turned the corner. The dividend cut was a necessary move that sets the company up for a recovery, despite leading some investors to unload their shares and drive the price down.
Just Energy has over 300,000 new customer additions for each of the past 8 quarters. Their investment in new markets coupled with boosted sales efforts (sales people routinely go door-to-door in prospective neighborhoods to pitch JE's services) has led to the most growth the company has ever experienced. Much of this can be attributed to JE's entering the commercial market. Prior to entering the commercial market in 2011, JE never had a quarter close to over 300,000 new additions. Their most recent quarter results showed 341,000 new additions in residential, home and business services - a 9% improvement over the same quarter last year. The company's top line has grown 16% YoY and 13% over the last quarter. Management expects their growth to continue. They forecast 46% growth for FY14, a substantial number that they look on their way to achieving.
Cost control has become a primary focus for Just Energy. Sales and marketing are the company's largest expenses, and as such they have looked for ways to get these costs down. They have just begun a telemarketing sales program and are also bolstering their online sales and marketing efforts. As this continues, costs are projected to decline some 30% over the next year. This will help bring the operating margins (currently under 3%) more in line with JE's competition.
Also of note is the company's recent sale of their former subsidiary Terra Grain Fuels. This is great for Just Energy's balance sheet as it eliminated some $68 million of debt and 45 employees off their payrolls. JE deserves some credit for trying to venture into the alternative fuels business, but the end result was that Terra Grain lost a lot of money for the company and operations were poorly managed. Ethanol prices saw declines over the past few years as demand decreased and supply increased, and the company's main feedstock - feed wheat - more than doubled in price. Add those together and the Terra Grain plant was losing a lot of money for the company. Now with that plant gone, JE can devote more cash and focus to its primary businesses.
Short interest as a percentage of float is just under 10%, down some 20% since its peak in July of last year. When shorts are covering it is always a good sign for investors. At current volumes it would take 30 days for shorts to cover all their shares. If JE can continue to improve their financial outlook and growth, I think we will see that short interest continue to drop - adding more upward pressure to share prices.
I also wanted to note the substantial investment that renowned Canadian investor and billionaire Ron Joyce (founder of Tim Hortons) has in Just Energy. He recently added another 130,000 shares of JE to bring his total to over 14 million shares owned - over 10% of float. As such he is now a "major shareholder" in the company and has a seat on their board. In my experience, following money like this has brought me great results. Billionaire investors know a lot more than me so I find it's an easier decision to invest in a company that's backed by people such as Ron Joyce. He wouldn't be increasing his investment if he thought JE was going to keep losing him money.
I believe a lot of the selling of JE the past year can be attributed to the dividend cut of 30% near the beginning of 2013, as well as the poor financial performance as of late. Income investors who were loving the monthly dividend began looking elsewhere as they felt JE's dividend was no longer safe.
However, I believe that Just Energy's dividend is now safe at its current level and shares are priced attractively for the income investor. I also believe that the share price has found its support and has little downside at current levels. I recommend buying shares of JE at current levels, and enrolling in the company's DRIP program which reinvests dividends into shares of the company at discounted prices and without any costly broker fees. Investors should then keep an eye on JE's free cash flow and the payout ratio - making sure it remains at 100% or less - to ensure the dividend remains safe. For another strategy to get monthly dividends from utilities, as well as why I feel monthly dividends are advantageous to quarterly dividends, feel free to read my previous article here.