Two Utilities with 6% Yield and Street Support

Includes: NKA, UTL
by: George Fisher
There are two utilities that offer a 6% or greater yield and are well liked on the Street. Niska Gas Storage LLC, (NYSE:NKA) and Unitil Corp (NYSE:UTL) fit the bill of higher yield and an analyst rating of “buy or better”. Utility investors are usually presented with two basic choices: higher current yield and lower growth or lower current yield and higher growth. Depending on an investors specific circumstance, either may be appropriate. These two fall into the category of higher current yield and lower growth.
Niska Gas Storage operates three natural gas storage facilities with total storage capacity of 204 bcf, located in Canada, Northern California and Oklahoma. NKA is the largest independent natural gas storage operator in North America. 51% of revenues forecast for FY March 2011 will come from long-term contracts, 18% from short-term contracts and 30% from “proprietary/optimization”. Growth going forward is expected to favor short-term contracts.
NKA is structured as a master limited partnership (MLP), and unit holders should be aware of the tax consequences of such. Distributable cash flow per share is projected to decline slightly this year compared at $1.73 for FY March 2012 versus $1.79 per share for FY March 2011. However, the distribution is expected to rise from last year’s $1.22 to $1.44, representing an 83% payout. Future growth over the next few years will come from organic expansion of current storage facilities. Management is looking to add 10% storage capacity.
NKA trades at $20.50 and offers a 6.9% yield, based on a current $0.35 quarterly distribution.
Unitil Corp is a small-cap Northeast electric and gas regulated utility. The company services about 100,000 electric and 67,000 gas customers in Maine, New Hampshire, and Massachusetts. The company is in various stages of rate reviews across its service area. Return on equity last year was a below-par 5.0%. With positive rate relief, ROE should increase to between 7.5% and 8.0% over time. Improving returns will add to earnings, which are estimated at $1.40 per share this year and $1.70 next. Even with improving earnings, the payout ratio is above 80%.
UTL trades at $22.75 and offers a 6.1% yield based on an annual dividend of $1.38.
Neither have very exciting capital gains potential as they are fully valued for earnings. However, the above average distribution income seems secure and yield seeking investors may consider further research. With the potential of a future rising interest rate headwind, starting out with a 6.0%+ yield may help provide competitive rate support to share prices.
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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.