Entergy Corporation: Inexpensive Stock for Dividend and Value Investors

Dec.13.10 | About: Entergy Corporation (ETR)

Overview

The market (NYSEARCA:SPY) is up 13.68% YTD. If you are looking for an inexpensive stock that didn’t follow the market, you should consider Entergy Corporation (NYSE:ETR). At $70.37, ETR is trading at only 2.51% from its year low of $68.65 reached on December 9, 2010. The stock is also trading at 44.80% from its all-time high of $127.48 reached on January 8, 2008.

Entergy Corporation is an integrated energy company engaged primarily in electric power production and retail electric distribution operations. Entergy owns and operates power plants with approximately 30,000 MW of electric generating capacity. Entergy delivers electricity to 2.6 million utility customers in Arkansas, Louisiana, Mississippi, and Texas. The company operates primarily through two business segments: U.S. Utility and Non-Utility Nuclear.

  • U.S. Utility generates, transmits, distributes, and sells electric power in a four-state service territory that includes portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small natural gas distribution business.
  • Non-Utility Nuclear owns and operates five nuclear power plants located in the northeastern United States and sells the electric power produced by those plants primarily to wholesale customers. This business also provides services to other nuclear power plant owners.

Entergy also operates the Energy Commodity Services segment and the Competitive Retail Services business.

Here are Entergy’s 2009 sales proportions by operating segments:

Operating Segments

2009

Utility

75%

Non-Utility Nuclear

24%

Parent Company & Other Business Segments

1%

Click to enlarge

Here are Entergy’s 2009 operating revenues proportions by fields of activities:

Operating Revenues

2009

Electric

73.33%

Natural gas

1.60%

Competitive businesses

25.07%

Click to enlarge

Volatility and Past Returns

ETR is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of ETR is measured by its beta ratio of only 0.64, which signifies that the stock has a theoretical volatility 36% lower than the market. We compared the return of ETR with the market (SPY) from the years 1994 to 2010 YTD (As of December 10). We have also included the return of ETR for the years 1991, 1992 and 1993. All paid dividends are included in the returns.

Civil year

Entergy Corporation (ETR)

Market (SPY)

1991

48.68%

N/A

1992

24.96%

N/A

1993

21.78%

N/A

1994

-27.84%

0.33%

1995

55.12%

37.71%

1996

8.73%

22.35%

1997

24.10%

33.35%

1998

15.36%

28.49%

1999

-9.79%

20.32%

2000

71.22%

-9.70%

2001

-4.55%

-11.78%

2002

19.99%

-21.54%

2003

28.82%

27.88%

2004

21.62%

10.54%

2005

4.76%

4.70%

2006

37.63%

15.61%

2007

32.26%

5.16%

2008

-27.94%

-36.38%

2009

2.06%

26.05%

2010 (As of December 10)

-10.06%

13.68%

Click to enlarge

Over the 17 periods observed, ETR outperformed the market 10 times. An investment made in ETR on December 31, 1993 had a return of 322.18% on December 10, 2010, while an investment in the market (SPY), for that same period, had a return of 232.71%. As investors, it’s important to not underestimate the weight of dividends. In the total return of 322.18%, the dividends accounted for 42.14% of that total return. The “lost decade” has not been lost for Entergy’s long investors because an investment made in ETR on December 31, 1999 had a return of 269.12% on December 10, 2010, while an investment in the market (SPY), for that same period, had a return of only 0.01%. The dividends were responsible of 34.29% of the total return for that period.

Actually, ETR is heading for a third bad year in a row in terms of return, what never happened in the last 20 years. Over that period, each time ETR had a negative year, the following year was positive. 2010 will probably be negative.

EPS and Dividends

Let’s have a look at the past EPS, dividend per share and payout ratio of ETR in the first table and at the dividend growth in the second one.

Year

Diluted EPS

Dividend per share

Payout Ratio

1994

$1.49

$1.80

120.81%

1995

$2.28

$1.80

78.95%

1996

$1.83

$1.80

98.36%

1997

$1.03

$1.80

174.76%

1998

$3.00

$1.50

50.00%

1999

$2.15

$1.20

55.81%

2000

$2.97

$1.215

40.91%

2001

$3.23

$1.275

39.47%

2002

$2.64

$1.34

50.76%

2003

$4.01

$1.60

39.90%

2004

$3.93

$1.89

48.09%

2005

$4.19

$2.16

51.55%

2006

$5.36

$2.16

40.30%

2007

$5.60

$2.58

46.07%

2008

$6.23

$3.00

48.15%

2009

$6.30

$3.00

47.62%

2010

$6.65 (Estimated)

$3.24

44.95% (TTM)

Click to enlarge

Civil Year

Dividend Growth

1994 to 1995

0.00%

1995 to 1996

0.00%

1996 to 1997

0.00%

1997 to 1998

-16.67%

1998 to 1999

-20.00%

1999 to 2000

1.25%

2000 to 2001

4.94%

2001 to 2002

5.10%

2002 to 2003

19.40%

2003 to 2004

18.13%

2004 to 2005

14.29%

2005 to 2006

0.00%

2006 to 2007

19.44%

2007 to 2008

16.28%

2008 to 2009

0.00%

2009 to 2010

8.00%

Click to enlarge

The 2010 estimated EPS of $6.65 reflects the 3 quarters already completed with EPS of $5.39 plus the average analyst estimates for the Q4 EPS at $1.26. From 1994 to 2010 (2010 estimated), the compound annual growth rate was 9.80% for the company’s EPS, which is excellent. However, the EPS growth was not necessarily constant and linear over the period. Each year since 2008, the EPS of ETR is constant and firmly in the $6.00-$7.00 range.

The average payout ratio for the years 1998 to 2010 (2010 TTM) has been 46.43%. Each year since 1998, the payout ratio of ETR is constant around this average.

If we look at the dividend per share, focusing in a recent past since the year 2000, ETR increased its dividend 9 years in 11 over the period. 2006 and 2009 were the only years where the dividend was not increased. ETR seems to not have an “official” dividend increasing policy, like a dividend increase each first quarter of each year as an example.

However the dividend increases were constant over the period 2000-2010 and matched the EPS growth. This is confirmed by the constant payout ratio around the average for the period. Thus, as investors, we can expect future significant dividend increases if the company grows its future EPS.

With an annual dividend of $3.32, a TTM EPS of $7.02, a TTM payout ratio of 44.95%, the company has flexibility to increase the dividend and this one is safe. The current yield of ETR is 4.72% while the current yield of the market (SPY) is 1.77%.

Sales and Shares Outstanding

As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year. Buybacks of shares are also important to boost future EPS. Quarter after quarter, shareholders of a company that repurchases its shares become less and less diluted.

Here are the Entergy’s sales by year from 1994 to 2010 (2010 TTM). You will also find the weighted average shares outstanding – diluted, the sales/share and the price/sales (P/S) ratios for the years 1994-2010 (2010 TTM).

Year

Sales

Weighted average shares outstanding - diluted

Sales/Share

P/S

1994

$5,981,820,000

228,735,000

$26.15

0.61

1995

$6,287,206,000

227,670,000

$27.62

0.83

1996

$7,163,526,000

229,080,000

$31.27

0.74

1997

$9,538,926,000

240,210,000

$39.71

0.68

1998

$11,494,772,000

246,330,000

$46.66

0.63

1999

$8,773,228,000

245,130,000

$35.79

0.71

2000

$10,016,148,000

228,541,000

$43.83

0.97

2001

$9,620,899,000

224,733,000

$42.81

0.91

2002

$8,305,035,000

227,303,000

$36.54

1.25

2003

$9,194,920,000

231,146,000

$39.78

1.44

2004

$10,123,724,000

231,193,000

$43.79

1.54

2005

$10,106,247,000

214,441,000

$47.13

1.46

2006

$10,932,158,000

211,452,000

$51.70

1.79

2007

$11,484,398,000

202,780,000

$56.63

2.11

2008

$13,093,756,000

195,860,000

$66.85

1.24

2009

$10,745,650,000

195,838,000

$54.87

1.49

2010 (TTM)

$11,453,127,000

187,777,172 (latest indicated)

$60.99

1.15

Click to enlarge

The compound annual growth rate of the sales of ETR has been 3.98% for the period 1994-2009. For a utility company, this is overall a correct growth rate higher than inflation. If we look at the weighted average shares outstanding - diluted of the company, we can see a very encouraging point: the company repurchased its shares over time. We can clearly see a downtrend of the company’s outstanding shares from the years 1998-2010. The company has today 58,552,828 less outstanding shares than in 1998.

The average price/sales (P/S) ratio is 1.15 for the period 1994-2010 (2010 TTM). Actually, with a P/S of 1.15, ETR is directly on this historic average. However, if we focus in a more recent past, since 2000, the average P/S ratio of the company is 1.40. The current P/S of 1.15 is far below the average of the last 11 years which could suggest the stock is inexpensive.

Company’s P/E

Let’s have a look at the historic P/E of ETR.

Year

P/E at year-end

1994

10.69

1995

10.05

1996

12.63

1997

26.10

1998

9.84

1999

11.82

2000

14.25

2001

12.11

2002

17.27

2003

14.25

2004

17.20

2005

16.38

2006

17.22

2007

21.34

2008

13.34

2009

12.99

2010

10.02 TTM

Click to enlarge

For the period 1994-2010 YTD, we have 17 periods of P/E with an average of 14.56. We can clearly see over the period that the P/E of ETR is constant around the average without too much spreading. The actual TTM P/E of 10.02 is the second lowest of the period observed and is far from the average of 14.56. Moreover, the actual TTM P/E is below the average P/E of the Utilities – Regulated Industry at 12.52 (16 companies compared). The dividend and value investor can also find clues here suggesting that ETR is inexpensive.

Balance Sheets and Market Capitalization

Here are the company’s balance sheets for the fiscal year 1995, 2000, 2005 and 2010 MRQ (September 30). We have also included the sales, the net income, the weighted average common shares outstanding and the market capitalization at year-end.

Over that long period, ETR has been an excellent wealth creator for its shareholders. We can see this by the increase of the market capitalization of the company. From $5.22B in 1995, the market capitalization reached $12.73B on December 10, 2010. The company increased its value by constantly increasing its assets, liabilities, sales and net income over time. The stockholders’ equity of ETR has remained basically constant for the period 1995-2010 YTD. Despite the constant shareholders’ equity which is book value, it is clear that ETR shareholders became wealthier with the rising net income of the company, which pushed up the market capitalization of the company with a rising share price, and that produced an excellent return over the period.

Key Measures of the Fundamentals

Here is a summary of different key measures of the fundamentals of ETR compared to the average of 16 companies of the Utilities – Regulated Industry. The most advantageous measures (ETR versus the industry) have their numbers highlighted in bold.

Measure

Entergy Corporation (ETR)

Average Utilities – Regulated Industry (16 companies compared)

Actual spread from year low

2.51%

15.82%

P/E (TTM)

10.02

12.52

Yield

4.72%

4.77%

Dividend Growth (2009 to 2010)

8.00%

3.42%

Dividend Growth (2008 to 2009)

0.00%

2.52%

Dividend Growth (2007 to 2008)

16.28%

7.93%

Payout Ratio (TTM)

44.95%

58.57%

Profit Margin (TTM)

11.84%

10.51%

Operating Margin (TTM)

20.75%

19.97%

Current Ratio (MRQ)

1.73

1.16

Debt/Equity (MRQ)

1.38

1.37

ROA (TTM)

3.57%

3.67%

ROE (TTM)

15.42%

13.94%

Click to enlarge

Among the group of 16, ETR has the lowest “actual spread from year low” at 2.51%. The company is far from the average of the industry at 15.82%. As previously said in this article, the P/E of ETR is lower than the industry. Both ETR and the industry have a similar current yield. During the last 3 years, ETR increased its dividend at a higher growth rate than the industry 2 years out of 3. The average payout ratio of the group is 58.57%. ETR is below at 44.95%.

For the measure of the profitability, ETR has a TTM profit and operating margin of 11.84% and 20.75% respectively. The average TTM profit and operating margin of the industry are 10.51% and 19.97% respectively.

For the measure of the financial strength, the MRQ current ratio is 1.73 for ETR. The average of the group is 1.16. The company has a MRQ debt/equity ratio of 1.38, approximately equal to the average of the industry at 1.37.

For the measure of management effectiveness, ETR has a TTM ROA of 3.57%, slightly below the average of 3.67%. With a TTM ROE of 15.42%, ETR is slightly above the average of 13.94% for the industry.

Conclusion

The fundamentals of the company are all great: the stock is trading at only 2.51% from its year low of $68.65 and at 44.80% from its all-time high of $127.48, low volatility, excellent past return of the stock, current yield at 4.72%, safe and rising dividend, constant annual EPS firmly in the $6.00-$7.00 range, low P/E at 10.02, low P/S, payout ratio, profit and operating margin, current ratio and ROE all better than the industry and finally, the company has a strong short term historic of buyback of shares.

Philosophy

Finally, there are many places in the world where utility companies are state-owned. For example, Hydro-Québec in Canada is a state-owned company where the government pockets 100% of the dividends of the company each year being the only shareholder. Living in such states and paying for utility means not having the chance to participate in the revenues and profits of these gigantic utility companies which people use. The government pockets these profits. America’s public listed utility companies like ETR and others give private investors the opportunity to reclaim paid profits on electricity in the forms of dividends and capital appreciation.

Source for industry group and company description: Morningstar, Inc.

Disclosure: I am long ETR, SPY.