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First Energy (NYSE:FE) is a safe, high-dividend yielding stock with a 4.9% dividend yield. High dividend stocks performed spectacularly so far in 2011 because of the declines in long-term Treasury bond yields. First Energy returned nearly 29% including dividends and some fund managers benefited handsomely. Big names like Jean-Marie Eveillard, First Eagle Capital, have huge positions in the company. Jean-Marie Eveillard has more than $498 million of his fund invested in FE, while Millennium Management’s Israel Englander is also bullish on FE.

We are going to take a closer at FE and several of its comparables to see whether FE is worth the price tag. Our list includes American Electric Power (NYSE:AEP), Dominion Resources (NYSE:D), Duke Energy (NYSE:DUK) and Xcel Energy (NYSE:XEL).

FE reported second quarter earnings of $0.64 per share vs. the street’s $0.72 consensus. FE will not report its third quarter earnings until November 1. The second quarter earnings down from $256 million compared to the same quarter last year versus its second quarter earnings of $171 million this year. The company blamed less favorable tax conditions and a loss of certain wholesale contracts. FE is expected to earn $3.34 this year and $3.34 in 2012. Its current P/E ratio is 26.30 and its forward P/E is 13.71.

Valuation

FE is expected to increase its earnings by 1% over the next 5 years (estimate from Zacks), pushing its P/E ratio in 2014 to 13.07. In comparison, AEP is expected to grow by 4% and has a 2014 P/E of 11.27. D is expected to do even better. Analysts estimate it to grow by 5% over the next 5 years but this puts its P/E ratio in 2014 at 14.49. DUK is expected to grow by 4.5% and has an estimated 2014 P/E of 13.35. Our last comparison, XEL, has an expected earnings growth of 4.88% and an estimated P/E of 12.91 in 2014. FE looks slightly undervalued in comparison to D and DUK, while staying on par with XEL. In contrast, AEP appears to be trading at a slight discount, indicating that there might be some concerns about its dependence on coal.

Volatility

Using beta as a measure of volatility can help determine how volatile the stock is in comparison to the market. A beta of 1.0 means that the stock moves with the market, while a beta of less than 1.0 indicates that the stock is less volatile than the market and less likely to be affected by fluctuations in the market. FE has a beta of just 0.49. AEP also has a 0.49 beta. D is slightly higher at 0.55, while DUK is fairly less at 0.37. XEL is the lowest of the stocks we looked at, pulling in a beta of just 0.34. All of these stocks seem to be less risky than the market and that’s one of the reasons why they are considered as alternatives to government bonds.

Dividends

When dividends are high, a low volatility stock can function almost like a bond with more upside, effectively paying investors to wait for the stock to go up. High dividend utility stocks are a good example of this. The stocks we looked at each offer strong dividends. FE has a 4.90% dividend yield, much higher compared to AEP’s 4.70% yield, D’s 3.90% yield, and XEL’s 4.10% yield. DUK is tied with FE with a 4.90% yield.

Hedge Fund Ownership

Stocks that are favored by hedge funds tend to outperform the market by a few percentage points. At the end of the second quarter, 27 hedge funds had positions in FE. AEP had 16 hedge funds invested, D had 7, DUK had 12 and XEL had 14, making FE the most popular of the five by far.

Insider Purchases

Stocks purchased by insiders also tend to outperform the market. Of the stocks we looked at when considered FE, three had insider purchases within the last six months.

AEP had one insider purchase. On August 5, 2011, F. James Cordes, one of the company’s directors, bought 2000 shares at roughly $35.84 each. XEL also had one insider purchase in that period. Director A. David Westerlund bought 1,000 shares for $23.22 each on August 18, 2011. It was his sixth time buying in to XEL in the last 3 years. D was the most popular amongst insiders. It had two insider purchases; one for 2,075 shares at $48.18 each on May 20 from director P. William Barr and one for 10,000 shares from director Dr. W. Peter Brown at $48.71 each on August 22.

Conclusion

Overall, our valuation points to FE and AEP being slightly undervalued compared to other stocks in the group. Each has high volumes of hedge fund ownership, indicating a fair amount of perceived value. Both have performed so far this year as well, with FE returning 28.86% YTD and AEP returning 12.99%. We like First Energy and encourage investors to take a closer look at the stock if they want to invest in electric utilities.

Disclosure: I am long FE.

Source: First Energy: Dividend Stock That's Cheap Compared To Peers