TECO Energy: Solid Dividend at a Fair Price

Aug.21.11 | About: TECO Energy, (TE)

TECO Energy, Inc. (NYSE:TE) is a utility providing gas and electricity to the metro Tampa area in Florida. TE is a fully integrated electric utility with approximately 4.5 GigaWatts of generating capacity. TE also purchases, markets and distributes natural gas to its retail customers. TE is also engaged in coal mining and processing. TE was founded in 1899.

TE has been a consistent dividend payer. However, its dividends have increased very slowly over the past 10 years with typical growth on the order of 2-3% per year. Its current forward dividend yield is about 5.1% based on a closing price of $17.15 and an estimated forward annual dividend of $0.88. The most recent quarterly dividend was $0.215 per share and has just recently declared.

Prior to 2003, TE paid out a higher dividend around $0.355 per share per quarter. The dividend reduction was part of a restructuring program to re-establish TE's financial position in the wake of the merchant energy collapse.

The following chart shows the recent historical dividend yield based on a trailing twelve months dividend yield calculation:

Created from data from Yahoo Finance.

The above graph shows that TE has had a strong dividend performance and has only trailed the 10-year Treasury bond slightly in the past decade.

The following graph shows the performance of the stock and the dividend growth:

Created from data from Yahoo Finance

TE has shown very mild dividend growth with a fluctuating stock price. While the dividend yield is an attractive 5.1%, future growth could be a concern. The first step to apply the dividend discount model is to calculate an equity hurdle rate using the capital asset pricing model (CAPM).

TE has a surprisingly high beta of 0.92 according to Yahoo Finance. One typically expects utilities to have a beta much lower than 1. The most recent 10-year Treasury bond yield was about 2.1%. Using my own estimate of the equity risk premium of 6% gives an equity hurdle rate of 7.6%. Historical dividend growth has been around 2 to 2.5%.

Furthermore, these are reasonable numbers for long term growth. The best way to think about this would also be to consider the long term growth in population for the greater Tampa area which would probably be above the country average at approximately 1%, so a 2% or even 2.5% growth rate is not at all unreasonable.

Applying the dividend discount model with the forward dividend of $0.88 gives the following results:

TE DDM Results
Growth Implied Stock Price
2.0% 15.74
2.5% 17.29
3.0% 19.17
Click to enlarge
Source: Author calculation

This range of stock prices suggests that TE is close to a reasonable valuation unless one can make a case for a higher future growth rate. However, even if one could argue for a higher growth rate for TE, the next question would be is it one of the most attractive utility dividend stocks available?

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

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.