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Overview

Wisconsin Energy Corporation (NYSE:WEC) is a U.S.-based electric and gas utility which serves clients in Wisconsin and in part of Michigan. WEC is part of the S&P500 index.

WEC is an American corporation and therefore pays its quarterly dividends in U.S. dollars. All the following figures are thus in U.S. dollars.

Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

WEC pays a quarterly dividend.

The dividends are generally declared in January, April, July, and October, and are generally paid in March, June, September, and December.

WEC generally increases its quarterly dividend once a year, in January. Still, WEC sometimes also increases its quarterly dividend in July.

The last increase in January 2014 was of 2.0% (from $0.3825 per quarter to $0.39 per quarter). However, it is to be noted that WEC also increased its quarterly dividend in July 2013 by 12.5% (from $0.34 per quarter to $0.3825 per quarter).

Dividend History

With the most recent increase, WEC has increased its quarterly dividend for 11 consecutive years, making WEC a dividend contender (between 10 and 24 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

The recent dividend history of WEC is interesting. Between 2004 and 2008, WEC increased its dividend at a steady yet reasonable rate (between 5% and 10%). Then, starting in 2009, WEC began to increase its dividend at much high rates (between 15% and 30%).

As we will see below, there is a good reason for these higher growth rates. However, I don't think WEC will be able to maintain such high dividend growth rates over the long term. After all, WEC is a utility and utilities don't grow at 20% per year year in year out.

Still, even if WEC cannot maintain such high divided growth rates, it remains that they are clear signals from WEC's management about its dividend policy.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?

  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios. The graph above is almost a dividend investor dream.

Over the last 10 years, both the earnings and the dividends have been growing steadily. In fact, with respect to the earnings, they have constantly grown year-over-year over the last decade. Personally, I don't see that very often.

The only negative point is the rise of the payout ratio, particularly since 2009. As we have seen above, since 2009, WEC has been aggressively increasing its dividend. However, the dividend has grown faster than the earnings. This explains the upward trend of the payout ratio.

Despite the rising trend, the payout ratio is still under 60%, which is very reasonable for a utility.

So, with earnings growing steadily and with a very reasonable payout ratio, WEC dividend is clearly safe.

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

As we have seen above, WEC has clearly shown its intention to pay growing dividends.

Also, we have seen that WEC's earnings have been rising. So, I simply don't see why WEC's dividend would not grow.

Clearly, it won't continue to growth at double-digit rates but still, it will continue to grow.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For WEC, I've used the following inputs:

  • Share price: $46.00

  • Dividend rate: $1.56

  • Dividend growth rate:

    • Optimistic scenario: 14.0%
    • Realistic scenario: 11.2%
    • Pessimistic scenario: 8.4%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for WEC varies from $50.16 (pessimistic) to $90.83 (optimistic) with a realistic value of $67.11.

With a current share price around $46.00, WEC appears undervalued. I've also calculated that the DGR would need to be 7.54% over the next 20 years to justify the current price of $46.00.

Notably, a DGR of 7.54% is slightly below the average earnings growth rate over the last 10 years, that is 7.68%. Hence, WEC would likely be able to maintain a DGR of 7.54% in the foreseeable future.

At $46.00, I think WEC is fairly valued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For WEC, I've used the following inputs:

  • Initial investment: $1000

  • Current yield: 3.39%

  • Dividend growth rate:

    • Optimistic scenario: 14.0%
    • Realistic scenario: 11.2%
    • Pessimistic scenario: 8.4%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

Clearly, being a utility, I don't think WEC will be able to maintain a DGR above 10%. So both the optimistic and the realistic scenarios are unlikely. However, if WEC can maintain an average DGR around 8.4%, it will return slightly more money than the benchmark stock.

In fact, if WEC can maintain an average DGR around 7.54%, the same DGR calculated above that would justify the current price of $46.00, WEC would behave almost exactly as the benchmark stock.

Since a DGR around 7.54% is very plausible, buying WEC would be more or less equivalent to buying the benchmark stock, at least with respect to the cash return. The only differences would be its slightly higher yield and slightly lower growth.

At the current price and yield, I think WEC would make a fair dividend investment.

Conclusion

I recently read that Warren Buffett could be interested in buying some Wisconsin utilities. Two names were mentioned, Wisconsin Energy and Alliant Energy (NYSE:LNT). After quickly checking WEC's dividend numbers, I got curious.

Overall, I would say that WEC is a nicely balanced dividend stock. Its yield is good (about 3%), its expected dividend growth rate is reasonable (around 8%), its payout ratio is safe (under 60%) and the stock is fairly valued.

At the current price and yield, you are likely to get what you pay for. So, overall, WEC would be a nice addition to any dividend portfolio. However, if you are looking for more growth, WEC might not be the best choice.

Final recommendation: I think WEC is a buy.

Full Disclosure: I don't currently own shares of WEC. I don't intend to initiate a position in WEC within the next 72 hours.

Source: Wisconsin Energy Corp. - Dividend Fact Sheet