- Integrys Energy Group provides electricity and natural gas in the Midwest.
- The large majority of its business is regulated, providing a good operating environment for its dividend sustainability.
- Even though its growth prospects are low, it is attractive for income investors due to its high and sustainable dividend yield.
Income investors usually favor stable businesses, with good profitability levels, and a strong cash flow generation capacity. One sector which usually meets these criteria is the utilities sector. Furthermore, utilities regularly pay a large part of their profits as dividends and are relatively resilient to macroeconomic cycles, making them relatively safe over the long term. In the US, the utilities sector (NYSEARCA:IDU) offers on average a dividend yield of about 3.1%, which is quite attractive for income investors. However, there are some utilities that yield even more, like Integrys Energy (NYSE:TEG) which currently yields about 4.6%. Integrys is a leading Midwest energy company, operating in the natural gas and electricity businesses. It has a market capitalization of about $4.7 billion and is listed on the New York Stock Exchange.
Integrys Energy Group, Inc. is an American energy company headquartered in Chicago, Illinois. It was formed by the merger of WPS Resources Corp. and Peoples Energy Corp. on February 21, 2007. Its operating subsidiaries provide natural gas and electricity in both the regulated and nonregulated energy markets. In addition, it has a 34% equity interest in American Transmission Company, an electric transmission company operating in Illinois, Michigan, Minnesota, and Wisconsin. Integrys employed about 4,900 people at the end of 2013.
Its long-term strategy is to growth through its core business of regulated activities. Integrys believes that a strong regulated utility base is essential to maintaining a strong balance sheet, predictable cash flows, a balanced risk profile, and attractive dividends. In 2013, about 80% of its earnings were derived from regulated activities, which is very good for its long-term dividend sustainability. Its target is for about 85%-90% of its core earnings to come from regulated operations. To increase its regulated assets base, the company intends to continue to invest mainly on electricity generation and natural gas pipeline infrastructure. Its average assets rate base is expected to grow 35% over the next three years.
Integrys' electricity supplies are nearly 60% generated using coal power, making it particularly vulnerable to "green" legislation. Electric utility companies are under increasing legislative pressure to adopt cleaner electricity generation methods. while maintaining competitive prices. Integrys is among the industry's players most affected by this shift to cleaner fuel sources, given that large utilities' reliance on coal is much smaller; for instance, Exelon (NYSE:EXC) only uses about 7% of coal to generate electricity. On the other hand, coal is the most cheaper fuel type it has available, given that in 2013 coal's cost was $2.57 per one million British thermal units compared to $3.47 for natural gas and $21.78 for fuel oil.
Its natural gas segment is highly seasonal, given that the majority of its customers use natural gas for heating. Therefore, costumer use is sensitive to weather and is generally higher during the winter months. In the past year, Integrys' natural gas segment revenues concentrated in winter months represented about 64% of its total. However, this seasonality is smoothed by higher electricity revenues during the summer months due to the air conditioning requirements of customers.
Regarding its financial performance, Integrys' revenues increased by 34% in 2013 due to the acquisition of Fox Energy Company to more than $5.6 billion. This acquisition amounted to $391 million, and increased its regulated electricity assets. Its EBITDA stood at $731 million, representing an EBITDA margin of 13% which is below the industry's average. Its net profit was $350 million or $4.43 per share. During the first quarter of 2014, the company's revenues were boosted by cold weather. The coldest weather in 30 years resulted in record throughput in its natural gas business. Nevertheless, its adjusted EPS was $1.73, slightly lower than in the past year. For the full year, Integrys' guidance is for consolidated adjusted EPS to be in the range of $3.50 to $3.75, assuming normal weather conditions for the remaining of the year.
Going forward, according to analysts' estimates, Integrys' growth is expected to be low over the next few years. Its revenues should increase to $5.8 billion by 2016, representing a CAGR of only 1% over the next three years. Its profitability is expected to improve slightly, reaching an EBITDA margin of 14% in 2016. Over the long term, Integrys' goal is for EPS growth in the range of 4% to 6% on average annualized basis. Even though this growth outlook isn't impressive, it should be enough to maintain an attractive dividend for the coming years.
Integrys' dividend history is relatively good, given that it has paid dividends for 73 consecutive years. However, its quarterly dividend has been unchanged for the past several years at $0.68 per share, or $2.72 per year. At its current share price, Integrys' dividend yield is about 4.6%, above the sector's average. Moreover, this yield seems to be sustainable given that its dividend payout ratio was 61% in 2013, in line with the industry's levels. As the company has a stable and heavily regulated business, this payout ratio is clearly acceptable and could be even a little bit higher. Therefore, even though Integrys does not have great growth prospects, for income investors who seek a high-dividend yield, it seems attractive due to its sustainable dividend over the long-term.