Although the stocks of utility companies generally do not demonstrate much in the way of capital appreciation, the companies are renowned for paying out hefty dividends. In the following article, I will analyze five utility companies which have a strong history of producing solid dividends. I picked these five utilities because they are all undergoing dynamic changes, including possible mergers, acquisitions and new technological innovations. As market veterans, they present an excellent entry point for discussion of the overall market conditions within the utilities sector.
Cleco Power (CNL): Cleco Power is a fully regulated utility company that generates electricity and distributes it to its customers in southeast Louisiana. Cleco Power managed to get its Rodemacher 3 project up and running in February of 2010 and more recently announced a 10-year contract to sell energy to Dixie Electric Membership Corporation (DEMCO), both of which greatly expand the company's outreach and revenue flow in the state of Louisiana. In addition to this growth potential Cleco Power also pays out a dividend of $1.25 per share (annually) which amounts to a dividend yield of 3.2%. The dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is well below the industry average of 60%, coming in at 35%. The stock itself is in a well established upward trend and hitting new 52 week highs on a daily basis. Two of the company's closest competitors in this market are American Electric Power Company (AEP) and Dominion Resources, Inc. (D). American Electric Power Company has a five year expected PEG ratio of 3.26 and Dominion Resources, Inc. has a five year expected PEG ratio of 3.36. Cleco Power is quite expensive by comparison with a five year expected PEG ratio of 8.97. I still rate Cleco Power a buy at current price levels.
NStar (NST): NStar supplies electricity and natural gas to its customers in Massachusetts and is the largest utility company in the state. The company is not exposed to the fluctuations in commodity prices because its rates are fixed to offset increased cost and pass them off to consumers. In addition to this guaranteed profit margin the company also pays a dividend of $1.13 per share on a yearly basis which amounts to a dividend yield of 2.5% at the stock's current price. This dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is above the industry average of 60%, coming in at 77%. In my opinion this is one of the safest utility companies, from an investment standpoint, because of the fixed rate that tracks commodity prices. The company's profits are virtually guaranteed and there is no delay in the cost adjustment or waiting period for an adjustment to be authorized. There is however one consideration an investor in the company should consider carefully. As early as the second quarter of this year a merger between NStar and Northeast Utilities (NU) may take place. The merger is pending approval of and will be regulated by the agencies in the states of Massachusetts and Connecticut. For these reasons, I believe NStar is well positioned for dividend growth in the coming quarters.
DTE Energy Company (DTE): DTE Energy Company supplies electricity and natural gas to its customers throughout the state of Michigan. This area of the country has stagnant population growth and the automobile industry in the area has had its share of problems. These related problems effect DTE Energy Company in a negative way at this time but the company has sought to overcome these obstacles through diversification. DTE Energy Company also runs one of the three largest coal transportation businesses in the country. Although in my opinion, coal transportation may represent some new obstacles for the company with the growing concern over carbon emissions. Remarkably the stock is in a well established upward trend and is just leveling off near its 52 week high. In addition to this capital appreciation the company pays out a dividend of $2.34 per share (annual basis) that produces a dividend yield of 4.3% at the stock's current price. The dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is slightly below the industry average of 60%, coming in at 55%. The company's two closest competitors are CenterPoint Energy, Inc (CNP) with a PEG ratio of 2.92 and Entergy Corporation (ETR) with a PEG ratio of 6.02. DTE Energy Company is moderately priced by comparison with a PEG ratio of 3.60. I expect DTE Energy to continue its upward trend in the short to mid-term.
MDU Resources Group (MDU): MDU Resources Group has operations in seven states in the Western United States. The company owns public utilities that distribute natural gas and electricity to customers it has in this region. In addition to utilities the company is well diversified in other business segments but its central focus is on energy. MDU Resources Group explores for and produces natural gas and oil, owns and operates a network of pipelines for these commodities as well as supplying construction materials and contracting to the natural gas industry. In the company's most recent earnings report, MDU Resources Group beat on earnings per share but most other metrics came up short. The stock itself has been range bound over the past 30 days between $21 and $22 per share. The company does nonetheless pay out a dividend of $.67 per share (annually) that produces a dividend yield of 3.1% at the stock's current price. The dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is slightly below the industry average of 60%, coming in at 58%. The company's two main competitors in this market are American Electric Power Company with a PEG ratio of 3.10 and Constellation Energy Group, Inc (CEG) with a PEG ratio of 3.41. MDU Resources Group is cheap in comparison with a PEG ratio of 2.66. I believe MDU resoures is on track to raise its dividend in the coming quarters.
FirstEnergy (FE): FirstEnergy has eight electric utility operating subsidiaries in Ohio, Pennsylvania and New Jersey. The company is in the process of transitioning its holdings to a market-rate price structure. Pennsylvania and New Jersey have market-rate pricing and Ohio is taking legislative steps in the same direction. In recent events pertaining to the company, FirstEnergy will be closing three of its coal-fired power plants in West Virginia due to new federal environmental regulations. This will be followed by six more closings in Ohio, Pennsylvania and Maryland. FirstEnergy stock has been range bound for most of the year, between $40 and $47 per share. The company pays out a dividend of $2.20 per share with a dividend yield of 5.1% at the stock's current price. The dividend is paid out on a consistent basis. With a payout ratio (trailing twelve months) of 91% of revenues, well above the sector average of 60%, the dividend cannot be raised much further. The company's two main competitors in this market are American Electric Power Company with a PEG ratio of 3.10 and Dominion Resources, Inc. with a PEG ratio of 2.81. FirstEnergy is extremely high priced in comparison with a PEG ratio of 11.63. Despite this, I believe FirstEnergy will continue paying its dividend, but will not likely raise it.