Power Opportunities: Plug Into the Electric Utility Industry

A private equity group will pay almost $32 billion to buy Texas power giant TXU Corp. (TXU) in the largest leveraged buyout in history. Individual investors don't usually have that kind of money but you don't need that much to plug into opportunities in the electric utility industry. Our search of the Reuters Select stock screens turned up not only value plays, but also showed that canny investors can reap good dividends as well.

We started off with the 11 of the 96 electric utility companies that recently appeared on a Reuters Select stock screen. (Click here for an Excel sheet comparing these 11 companies.) To identify reasonably valued companies that also have relatively little debt, we filtered for firms with debt to equity and long-term debt to equity ratios that are below the industry averages. This reduced our list to seven names.

To narrow the field further, we filtered for stocks that are trading at a discount to the industry. Specifically, we filtered for companies where the price to earnings (P/E) ratio is less than the industry mean. This resulted in a list of four companies.

Given our search criteria thus far, it is not surprising to find that most of these stocks have appeared recently on stock screens in the value category. A closer investigation, however, showed that it was not so much their price tags that helped these companies land on a screen, but their relatively high dividends. Three of the companies registered on the Income Stocks screen, which is designed to highlight companies with relatively superior dividends.

The Income Stocks screen starts off by highlighting companies that have dividend yields above 2 percent. Then the screen looks for companies that have dividend growth rates that are at least 10 percent above the industry average over the last three years. The screen also weighs payout ratios - the amount of net income that is doled out to investors in the form of dividends. While we want companies with high dividends, it is important to remember that an issue facing payout ratios is that they might be too high. To avoid such potentially problematic companies, the screen puts a ceiling on payout ratios, requiring that a company's TTM payout ratio must be no more than 25 percent above the industry norm. As indicated below, FirstEnergy Corp. (FE), PPL Corp. (PPL), and Xcel Energy Inc. (XEL) all clear these hurdles.

Disclosure: At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.