2 Five-Star Utility Picks With Generous Dividend Yields

Includes: AEP, UGI
by: Bret Jensen

Now that the Federal Reserve has stated they plan to keep interest rates close to zero for a few years, the quest for yield should accelerate over that time period. This should help the high yielding utility sector. Two stocks in the sector I like at these price levels are below:

UGI Corporation (NYSE:UGI) -- UGI Corporation, through its subsidiaries, distributes and markets energy products and related services in the United States and internationally. The company distributes propane to residential, commercial/industrial, motor fuel, agricultural, and wholesale users; sells, installs, and services propane appliances; and installs and services fuel systems for motor vehicles. It also distributes liquid petroleum gas (LPG) to residential, commercial, industrial, agricultural, and motor fuel customers principally in Europe for space heating, cooking, water heating, process heat, forklifts, transportation, construction work, industrial processing, and autogas applications, as well as provides logistic and storage services to third-party LPG distributors.

5 reasons to like UGI at under $28:

  1. It has sold off around 15% in the last two months and has a low historical valuation.
  2. It has a solid 3.8% yield which has shown a nice steady increase over the years.
  3. UGI sells at around 12 times this year’s projected earnings and under 11 times 2012’s consensus EPS.
  4. The stock provides a low beta (.36), is price at half its trailing annual revenues, and its market cap is less than 6 times operating cash flow.
  5. S&P has UGI as a Five Star pick with a price target of $36 and anaylsts’ median target on UGI is $35.

American Electric Power (NYSE:AEP) -- American Electric Power Company, Inc., together with its subsidiaries, engages in the generation, transmission, and distribution of electric power to retail customers. The company generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric energy. It also supplies and markets electric power at wholesale to other electric utility companies, municipalities, and other market participants. In addition, the company operates barging operations that transport coal and dry bulk commodities primarily on the Ohio, Illinois, and lower Mississippi Rivers, as well as operates non-regulated wind farms.

5 reasons to recommend AEP at under $36.

  1. It is selling in the bottom half of its five year valuation range based on P/E, P/S, P/B and P/CF.
  2. It yields a very generous 5.1% dividend yield and has grown its dividend 3.5% annually over the last five years.
  3. It is just a dollar or two over a long term technical support level (See Chart).
  4. This low beta stocks (.59) offers consistent revenues and earnings from its regulated businesses and sells at under 12 times earnings despite the over 5% yield.
  5. S&P has AEP as a five star pick with a price target of $42 and Credit Suisse rates it an “outperform” also with a price target of $42.

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Disclosure: I am long AEP.