4 Safe Utility Stocks For Strong Retirement Income

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 |  Includes: AEP, BKH, ETR, TE
by: ValueMax

With 10 year treasury yields hovering a bit below 2%, a compelling case can be made for electric and combined cycle utilities offering dividend yields twice or more as that treasury yield. And if a case can be made for some capital growth, all the better. I am going to look at four utility stocks today. Now is not the friendliest of times for many utilities, given the Environmental Protection Agency's pending issues with Mercury pollution and re-expansion of the Clean Water and Clean Air Acts, along with general trends of energy conservation. But quality utilities, including some of ones I cover today, will adapt.

Black Hills Corp. (NYSE:BKH)

Black Hills is a smaller, combined cycle utility and energy company serving much of South Dakota, and parts of adjacent states in both regulated and non regulated areas. Its stock was trading recently at about its 52 week high of $34.85. Its 52 week low has been $25.83. It is trading at a 12 month trailing price to earnings ratio of 18, and has a market capitalization of nearly $1.4 billion. It recently announced raising its dividend for the 42th consecutive year, to a quarterly $0.37 per share, for a yield of 4.3%.

Black Hills has one innate advantage over other utilities; its service area was relatively unscathed in the recent recession. But Black Hills has been as steady a performer as any utility in the country for decades, which is why I am leading off with it. It is a Zack's Financial 5 star equity, one of the few utilities to be so mentioned.

In its fourth quarter of 2011, Black Hills reported adjusted earnings (excluding discontinued operations and gains or losses from the sales of assets) of $19.7 million, or $0.46 per share, compared with 0.44 per share in the year earlier quarter. For all of 2011, adjusted earnings were $77.1 million, or $1.92 per share, a 13% increase in per share net from 2010, when Black Hills reported adjusted earnings of $70.3 million, or $1.81 per share. Revenue and profit gains occurred across all the company's regulated and non regulated businesses.

Analysts are forecasting Black Hills earnings of $2.15 in 2012, and this 12% growth gives it a PEG of 1.5, an attractive ratio for a safe, gently growing company. I urge you to take a look, especially on any price pullbacks.

TECO Energy, Inc. (NYSE:TE)

Teco is a large utility and power unit holding company, whose business is comprised primarily of Tampa Electric Company, Peoples Gas Company, and non regulated TECO Coal Company. Teco was trading recently at a little over $18 per share, and its narrow 52 week range is from $19.66 to $15.92. It is trading at a price to earnings ratio of 14.3, and has a market capitalization of nearly $4 billion, and pays a generous annual dividend of $0.86, for a yield of 4.7%

Teco did not have much of a fourth quarter of 2011. Owing to unusually mild weather across its central Florida footprint, revenues fell some $25 million, or 3.2% from the fourth quarter of 2010, and earnings of $53.2 million, or $0.25 per share, came in 14% below expectations of $0.29 per share. Gains at TECO coal in the quarter were not enough to offset weakness in the larger Tampa Electric Unit.

For all of 2011, Teco reported earnings of $272.6 million, or $1.27 per share. This was up from a GAAP $239 million, or $1.12 in 2010. Taking out one time charges from both years (there were none in 2011), and Teco's earnings actually declined one percent on a year to year basis.

I am very bullish on the economy of Florida. But it may take a while for Teco to catch up to the revenue path it was on before 2008, on an inflation adjusted basis. Analysts are neutral on the stock, and have a 52 week goal for the shares of just a few cents more than it is right now.

American Electric Power Company (NYSE:AEP)

Columbus, Ohio based American is one of the country's oldest and largest electric utilities. It has a footprint across eleven states, and over $5 million customers. American's stock was trading recently at about $39.60 per share, near the high end of its 52 week range of from $41.98 to $33.09. It has a price to earnings ratio of 10.5, and a market capitalization of $19.1 billion. It pays a quarterly dividend of $0.47, for an annual yield of 4.8%.

In its fourth quarter of 2011, American posted GAAP earnings of $308 million, or $0.64 per share. After eliminating the many one time credits and debits in the quarter, earnings from ongoing operations were $194 million, or $0.40 per share, a modest increase from 2010's $0.38 per share. For all of 2011, and looking at continuing earnings only, American reported earnings of $1.504 billion, or $3.12 per share, again a narrow premium over 2010's $1.45 billion, or $3.03 per share.

American has a broad range of power generation sources and is a leader in renewable energy investments. It also owns a non regulated shipping business, whose emphasis is dry goods, principally coal.

Analysts are mildly optimistic of American with a mean rating of 2.5, and they predict 2012 earnings of $3.18 per share, and in 2013, a total of $3.30 per share. This steady, 3 - 4 % growth is about all I look for from a utility. I urge you to give American Electric Power a look.

Entergy Corporation (NYSE:ETR)

It used to be that one could tell by the name of the utility in what part of the country the utility was based. Obviously, that is not so now, and Entergy is a New Orleans based combined cycle utility that operates a traditional electric and gas business in the lower Mississippi Valley, and also owns a half dozen nuclear facilities outside its footprint, the power from which is sold to other utilities and wholesale users. Entergy stock was trading recently at about $69, toward the high end of its 52 week range of from $74.26 to $57.60. It is trading at a price to earnings ratio of 9, and has a market capitalization of 12.2 billion. It pays a quarterly dividend of $0.83 per share, for a quarterly yield of 4.8%.

In its fourth quarter of 2011, Entergy reported earnings of $151.4 million, or 0.87 per share, compared with the year ago reported earnings of $228 million, or $1.26 per share. The company blamed tax issues, and not operational issues, for the precipitous decline. For full year 2011, earnings were $1.3 billion, or $7.55 per share, compared with 2010's $1.19 billion or $6.66 per share

I think of Entergy as being an enlightened company, primarily because of this essay. But analysts estimate profits falling each of the next two years. Much of that downside is already priced into the stock, yet, I would avoid this issue.

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