7 Utilities Stocks With Strong Sources Of Profitability

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 |  Includes: AEP, DTE, ETR, NST, SUG, TE, WEC
by: Kapitall

There is always more to a company’s story than its bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways – some more preferred than others. This is why it is always a good idea to study the sources of profits for a company.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases in ROE can be attributed to those components.

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on the utilities sector.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.‬

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these companies have strong profitability? Use this list as a starting point for your own analysis.

List sorted by increase in ROE.

1. TECO Energy, Inc. (NYSE:TE): An electric and gas utility company, through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electric energy. Market cap of $4.0B. MRQ Net Profit Margin increased to 9.90% from 5.66% year-over-year, Sales/Assets increased to 0.1249 from 0.1214, while Assets/Equity decreased to 3.23 from 3.46. The stock has gained 14.15% over the last year.

2. American Electric Power Co., Inc. (NYSE:AEP): Engages in the generation, transmission, and distribution of electric power to retail customers. Market cap of $19.19B. MRQ Net Profit Margin increased to 21.44% from 13.68% year-over-year, Sales/Assets increased to 0.0847 from 0.0815, while Assets/Equity decreased to 3.48 from 3.64. The stock has gained 19.12% over the last year.

3. Southern Union Co. (NYSE:SUG): Engages in the gathering, processing, transportation, storage, and distribution of natural gas in the United States. Market cap of $5.25B. MRQ Net Profit Margin increased to 9.40% from 7.66% year-over-year, Sales/Assets increased to 0.08 from 0.06, while Assets/Equity decreased to 3.13 from 3.21. The stock has gained 77.96% over the last year.

4. Entergy Corporation (NYSE:ETR): Operates as an integrated energy company in the United States. Market cap of $12.70B. MRQ Net Profit Margin increased to 18.64% from 14.94% year-over-year, Sales/Assets increased to 0.0867 from 0.0862, while Assets/Equity decreased to 4.22 from 4.28. The stock has gained 9.16% over the last year.

5. NSTAR (NYSE:NST): Engages in sale, distribution, and transmission of electricity and natural gas to commercial, industrial, and residential customers in Massachusetts. Market cap of $4.64B. MRQ Net Profit Margin increased to 12.12% from 9.52% year-over-year, Sales/Assets increased to 0.1050 from 0.1016, while Assets/Equity decreased to 3.82 from 4.08. The stock has gained 12.62% over the last year.

6. Wisconsin Energy Corp. (NYSE:WEC): Engages in the generation, distribution, and sale of electric energy and steam. Market cap of $7.62B. MRQ Net Profit Margin increased to 12.33% from 11.53% year-over-year, Sales/Assets increased to 0.0795 from 0.0765, while Assets/Equity decreased to 3.34 from 3.38. The stock has gained 16.19% over the last year.

7. DTE Energy Co. (NYSE:DTE): Operates as an electric and natural gas utility company in Michigan. Market cap of $8.85B. MRQ Net Profit Margin increased to 8.08% from 7.62% year-over-year, Sales/Assets increased to 0.0914 from 0.0881, while Assets/Equity decreased to 3.56 from 3.65. The stock has gained 21.21% over the last year.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

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