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Two phrases that almost never go together are “utilities” and “large insider ownership”. Most utilities have a small percentage of shares in the hands of management. Due to usually very large number of shares outstanding, it is atypical to see large insider ownership. Many executives accumulate their holdings when a company is in its infancy, and most utilities have been around for a long, long time.

With this in mind, I went hunting for utilities with a 10% or greater insider ownership. Not unexpected, many of the utility companies with higher insider ownership were small-caps.

The concept of investing in companies with substantial insider ownership is it will tend to fuse the interests of management and shareholders. With a significant personal stake in the companies they manage, above average returns rewards both classes of investors. In addition, high insider ownership tends to reduce excessive management stock options and executives don’t want to dilute their personal stake.

However, don’t take high management ownership as the only criteria for stock selection. Keep in mind that both Ken Lay and Jeff Skilling owned large amounts of Enron stock, and history reminds us of the value of this holdings today. If management holds too much company stock, they effectively control the company and can manage it as they like, which may not be in all shareholder’s best interest. A nice balance is between 10% and 40% insider ownership.

Out of the universe of all utilities, only 12 companies made the list of 10% or greater inside ownership and a trailing twelve month positive ROE. Three were foreign companies. Below is a table comparing five of these:

Company

Scana

Otter Tail

AES

Gas Natural

SJW

Ticker

SCG

OTTR

AES

EGAS

SJW

Sector

Diversified

Electric

Electric

Gas

Water

Insider %

10.8%

11.8%

15.9%

18.0%

40.4%

Institutional %

48.9%

29.5%

73.2%

7.2%

47.2%

Yield

4.5%

5.2%

3.7%

5.0%

2.9%

Div Growth 5-yr

5.2%

1.5%

na

na

5.3%

ROIC 5-yr

4.8%

4.4%

1.2%

10.5%

4.7%

SJW is a water utility servicing California. Based on current valuations, the stock is considered overvalued based on historical PE and dividend yield ranges, along with peer comparisons. With flat to lower eps since 2005, SJW’s rich price seems unwarranted.

Gas Natural is a natural gas utility servicing the West, Midwest, Northeast and Mid Atlantic states. Gas Natural targets areas where gas is underutilized and where there are above average opportunities for commercial and industrial conversion from oil or propane. Growing by acquiring smaller, local utilities, EGAS has recently started to gain a Wall Street following. Yielding about 30% higher than its peers, Gas Natural offers investors both a monthly dividend and capital gains potential.

Otter Tail is an electric utility servicing the upper Midwest. While its service area is predominately smaller communities where growth potential is limited, OTTR has expanded into non-regulated utility businesses. In the late 1980s, OTTR began investing its stable cash flow into manufacturing, medical equipment, PVC piping, food processing,and transportation. OTTR manufactures wind towers and has a great relationship with several turbine manufacturers. With only 30% of revenues generated from its electric utility business, OTTR offers both above average dividend and earnings growth potential.

AES is the largest of the group with a market capitalization of 9.1 billion and is a component of the Dow Jones Utility Index. AES is a global electric generation and transmission company servicing 11 million customers in 29 countries. AES recently announced a joint venture in China to develop renewable energy. The company has been involved in the China electric generation market since 1994.

Scana is a Carolina based electric utility that is in the process of building a new nuclear power plant. With 55% ownership in the new plant, earnings will improve as nuclear power is less expensive to generate than conventional plants. However, SCG’s share of the construction costs is about $6.5 billion versus a market cap of $5.5 billion.

The balance of the utility companies that made the list of substantial insider holdings include: UGI Corp (UGI) (Diversified); Ormat Technologies (ORA) (Electric); National Fuel Gas (NFG) and AmeriGas (APU) (Gas)

Investors seeking utilities investments where management and shareholders are unusually connected at the hip should consider researching these companies.

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Source: Utility Stocks With Unusually High Insider Ownership