Xcel Energy: Rising Regulatory Rates Provide Dividend Growth

| About: Xcel Energy (XEL)

The market has moved substantially since the early October lows, yet risk remains given ongoing European financing worries tied to soaring sovereign debt yields. In the U.S., bond yields will remain timid, which increases the attractiveness of predictable high dividend stocks such as Xcel Energy (NYSE:XEL), a Midwest electricity provider.

Xcel provides investors with regulatory controlled revenue growth, which helps insulate shares from volatility. Last quarter, the company saw its electricity sales increase to $2.62 billion last quarter, up from $2.44 billion the prior year. And natural gas revenue rose to $194.9 million from $170.6 million. This kind of clarity has supported 7% compounded annual earnings growth since 2005.

In Q3, the company's earnings were $0.69 versus $0.62 last year, bringing 9-month earnings to $1.43 versus $1.34 in 2010. Much of the upside came from interim rate increases in Minnesota, where NSP-MN earnings rose to $0.29 from $0.24 last quarter and $0.62 versus $0.48 in the first nine months, respectively. Overall, rate increases contributed $41 million more to margin last quarter. And, rates have contributed an additional $97 million in earnings so far this year.

Earnings strength supports Xcel's target of a 10% annual shareholder return. Since 2005, dividends have grown at a compounded annual rate of 3.2%. Internal targets call for 2-4% annual dividend growth going forward, suggesting investors will continue to receive competitive yield. At current share prices, the stock is yielding 4%, roughly in line with the 3.9% yield on the utilities spider ETF (NYSEARCA:XLU).

And, even more flexibility comes from the company's issuance of $700 million in low cost debt, which reduced financing costs and provided for the retirement of its higher cost preferred. In the first nine months, total operating expenses fell to 82.2% from 83.2% year-over-year, a reflection of solid management.

The company hopes to expand multi rate proposals. This would provide additional revenue clarity and reduce the lag between costs and rates.

Overall, the company is targeting annual earnings growth of 5-7% and is guiding to the top end of its $1.65-$1.75 forecast for 2011. Next year, it expects earnings of $1.75-$1.85 thanks to additional rate increases.

As investors look to insulate portfolios from risk with dividend paying stocks with predictable top and bottom lines, utilities remain an attractive alternative. With significant regulatory clarity and a history of dividend growth, Xcel offers a stable yield with price upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XEL over the next 72 hours.