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Electric utilities have long been revered for their dividend income. Growth by these companies has historically been slow due to their businesses being regulated by the states in which they operate. To get around that, most utilities acquired non regulated businesses, often also in the energy arena. But earning money manufacturing wind turbines, or selling natural gas, was much easier to do on a drawing board than in reality. I this article I will provide analysis on a diverse group of four traditional utilities, to see which are most successful in navigating these now partially regulated waters. I chose these four stocks because they present a good starting point for analysis of the electric utilities sector.

Otter Tail Corporation (OTTR)

Otter Tail is an electric utility with about 130,000 customers in rural parts of Minnesota and the Dakotas. It also owns several unregulated units, such as a metal stamping business, a wind energy company, and a plastics unit. It used to be far more diversified, but sold its sporting goods unit, a health technology company, and a potato farm, the past few years. Otter Tail's stock was trading recently at about $22 per share, near the high end of its 52 week of from $23.48 to $17.53. It has a market capitalization of nearly $800 million. Otter Tail is paying an annual dividend of $1.19, for an annual yield of 5.3%. It does not have a price to earnings ratio, due to recent losses under Generally Accepted Accounting Principles (GAAP).

Otter Tail's earnings are a mess nowadays due to the all the recent asset sales, all done under a management plan to have a more nimble company and reduce its risk profile. In its fourth quarter of 2011, Otter Tail recorded earnings from continuing operations of $17.1 million, or $0.46 per share. Under GAAP rules, the company had a quarterly loss of $1.39 per share.

My fear is that Otter Tail has sold the earnings heart out of the company, and is left with a small, rural utility. Otter Tail used to be among my favorite utility companies because its broad diversity evened out and broadened earnings. But Otter Tail's wind energy business is a money losing business right now, while the stamping and plastics businesses are performing well. Focusing on just being a small, rural utility will make it very hard to do any more than cover the dividend for the next year or two, and management is predicting earnings of about $1.20 per share in 2012. I urge you to avoid Otter Tail for now.

Alliant Energy (LNT)

Alliant is a combined cycle utility holding company that operates in the upper Midwest. It also owns non-regulated businesses including, a shipping company, a rail line and a renewable energy company. Alliant has announced its intent to sell the renewable energy company.

Alliant stock was trading recently at about $43 per share, near the high end of its 52 week range of from $44.57 to $33.91. It is trading at a price to earnings ratio of 16.2, and has a market capitalization of $4.8 billion. Alliant pays a quarterly dividend of $0.45 per share, for an annual yield of 4.2%.

In Alliant's fourth quarter, 2011 profit increased to $57 million, or $0.51 per share, a 19% improvement from the fourth quarter of 2010 when profits were $47.3 million, or $0.43 per share. For all of 2011, GAAP earnings rose from $2.60 per share in 2010 to $2.74 per share in 2011. Absent one time items, earnings increased marginally, from $2.73 in 2010, to $2.77 per share in 2011.

Alliant is considering constructing a new $700 million, gas fired facility in Iowa. Alliant's renewable energy division, RMT, has been a money loser for Alliant. Management believes selling the unit will involve costs of about five cents a share, and has pegged 2012 earnings at $2.75 to $3.05 per share. The median, or $2.90 per share, would establish the type of gently rising earnings I like to see from a utility.

I believe Alliant as a long term play in the utility sector, and urge you to take a closer look.

PP&L Corp. (PPL)

PP&L is a large, combined cycle utility with operations in the Northeast, Northwest, and Great Britain. Its stock was trading recently at between $28 and $29 per share, toward the high end of its 52 week range of from $30.27 to $24.10. PPL has a price to earnings ratio of 10.8, and a market capitalization of $16.5 billion. It recently raised its quarterly dividend to $0.36 per share, for an annual yield of 5.1%.

PP&L recently wrapped up a solid end to a very good year. GAAP earnings for the fourth quarter of 2011 were $401 million, or $0.69 per share, compared with $355 million, or 0.73 per share in the fourth quarter of 2010. Adjusted earnings were $405 million in 2011, versus $404 million in year ago quarter. For all of 2011, GAAP earnings were $1.44 billion, or $2.61 per share, versus GAAP earnings of $938 million, or $2.17 per share. Adjusted earnings for 2010 were $1.5 billion, versus $1.4 billion in 2010.

Much of the PP&L we know today, with its vast footprint and diluted common shares, is the result of two recent multibillion-dollar transactions, both with German energy giant Eon AG (EONGY.PK). First, in 2010, PP&L purchased two Kentucky-based utilities for $7.6 billion. And then, in 2011, it purchased British electrical grid assets for another $5.6 billion. And what has PP&L gotten for its huge investments and substantial share dilution? Management projects 2012 earnings within fifteen cents of $2.30 per share. Management blames the expected decline on narrowed margins and negative hedging comparisons.

PP&L's stock is quite cheap on a trailing price to earnings basis. But still, it is expected that it will be at least until 2014 that PP&L again touches its 2011 earnings. I would avoid this company.

Wisconsin Energy Corp. (WEC)

Wisconsin Energy is a combined cycle utility providing regulated service in Wisconsin and Upper Michigan. It has a modest steam business in downtown Milwaukee, and has a non-regulated real estate development business. Its stock was trading recently at about $34 per share, near the high end of its 52 week range of from $35.38 to $27.00. It is trading at a trailing price to earnings ratio of $15.3, and has a market capitalization of $7.9 billion. Wisconsin Energy recently raised its dividend to $0.30 per share, for an annual yield of 3.5%.

In its fourth quarter of 2011, Wisconsin Energy posted adjusted earnings of $114.9 million, or $0.49 per share, which while down eight percent from $0.53 per share in the fourth quarter of 2010, beat estimates of $0.47 per share. For all of 2011, earnings net of discontinued items were a company record $526 million, or $2.18 per share, up 14% from 2010's $1.92 per share. Supporting the earnings growth was revenue growth of a little over two percent on a year over year basis, to nearly $4.5 billion.

In recent years, Wisconsin Energy had been purchasing over a third of the energy it used on the wholesale market. To combat that, in the middle of the last decade it launched its $6 billion, "Power the Future Plan." It envisioned, and Wisconsin Energy has executed, a variety of generating units from coal, natural gas, and alternative energies. Wisconsin Energy for many years had been on the miserly side in its dividend policy, and has declared a goal to aggressively raise its dividend to 60% of earnings by 2014. Being that the dividend is currently just over half of earnings, there is ample dividend growth beyond the new $0.30 level. Combine that, along with Wisconsin Energy's moderate current valuation, and this is a winning utility for long-term investors.

Source: 2 Electric Utilities To Buy, 2 To Avoid