XCEL Energy Inc Dividend Stock Analysis

| About: Xcel Energy (XEL)

Summary

Xcel Energy is an electric and gas utility business operating in 8 states in US.

The company has most of its operations in electric segment (90%) and the rest in natural gas segment (10%).

Xcel is a Dividend Contender having raised dividends for 12 consecutive years and 5-yr dividend CAGR of 4.1%.

Xcel is targeting growth rates of 4-6% in earnings, 5-7% in dividend growth, with a 60-70% dividend payout ratio.

Xcel Energy Inc (NYSE:XEL) is an electric and gas utility company operating in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin. The company's operations are composed of 90% electric (serving 3.5M customers) and 10% in the natural gas (serving 2M customers) segment.

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(Source: Xcel Energy Inc Investor Relations)

Corporate Profile (from Yahoo Finance)

Xcel Energy Inc., through its subsidiaries, engages primarily in the generation, purchase, transmission, distribution, and sale of electricity in the United States. It operates through Regulated Electric Utility, Regulated Natural Gas Utility, and All Other segments. The company generates electricity using coal, nuclear, natural gas, hydro, solar, biomass, oil and refuse, and wind energy sources. It is also involved in the purchase, transportation, distribution, and sale of natural gas. In addition, the company engages in developing and leasing natural gas pipelines, and storage and compression facilities; and investing in rental housing projects. It serves residential, commercial, and industrial customers, as well as public authorities in the portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin. Xcel Energy Inc. was founded in 1909 and is based in Minneapolis, Minnesota.

A Closer Look

Xcel Energy Inc operates both in electric and gas utility business. This has been identified in the utilities industry as the path to growth going forward. Other competitors who operated solely in the electric-only business, have started purchasing assets in the gas-utility business in order to diversify and achieve growth. We have seen this lately with the moves from Southern Company(NYSE:SO) acquiring AGL Resources Inc (NYSE:GAS); and Duke Energy (NYSE:DUK) acquiring Piedmont Natural Gas (NYSE:PNY).

The moves are motivated by the fact that electric-only utilities are seeing declining revenues over the years due to a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. In addition, power generating companies are moving to secure natural gas infrastructure as the industry moves to accommodate the US government mandate targeting power plants to cut carbon emissions by 32% (by 2030) on the 2005 levels. Most of the CEOs in the utility industry have accepted the terms and do not intend to fight against the mandate.

Xcel Energy's focus remains electric utility business with the segment forming 90% of the overall business.

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(Source: Xcel Energy Inc Barclays Utilities Conference Presentation)

Xcel's investments are evenly mixed as per their plans from 2016 to 2020: electric distribution (27%), electric transmission (27%), electric generation (22%), natural gas (13%), Minnesota Integrated Resource Plan (3%), and Other (8%).

Based on the investment objectives, Xcel Energy is targeting a growth rate of 4-6% in earnings, 5-7% in dividend growth, with a 60-70% dividend payout ratio. Based on the detailed analysis provided below, we believe the dividend growth rates may fall closer to the lower end of the target.

Dividend Stock Analysis

Financials

Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations.

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(Source: Created by author. Data from Morningstar)

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(Source: Created by author. Data from Morningstar)

Actual: The utility industry is resilient and has seen steadiness over the years. However, revenue has continued to face some pressure over the years and have seen slower growth year after year. Likewise, earnings remain pressured due to the lower revenue growth. The debt load is stable over the course of time and Xcel has a debt/equity of 1.25. The company's balance sheets show a current ratio of 1.10.

Debt & Credit ratings: S&P gives it a "A-" credit with a "Stable" outlook. Moody's gives the company a A3 credit rating with a "Stable" outlook. Fitch gives the company a "BBB+" with a "Stable" outlook.

XEL's yield to maturity is as shown below:

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(Source: Morningstar)

Dividends and Payout Ratios

Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future.

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(Source: Created by author. Data from Morningstar)

Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. Xcel Energy is a Dividend Contender having raised dividends consecutively for 12 years - and those dividends have been rising faster in the last couple of years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 7.3%, 4.8%, 4.1%, and 4.1% respectively. Coupled with a current dividend yield of 3.54%, Xcel Energy has a Chowder Rule number of 7.64. The current payout ratio is 65.6%, right in the middle of the target 60-70%.

Outstanding Shares

Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

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(Source: Created by author. Data from Morningstar)

Actual: The number of shares have steadily increased over the years as the company has issued more equity.

Book Value and Book Value Growth

Expected: Growing book value per share.

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(Source: Created by author. Data from Morningstar)

Actual: The book value has trended upwards at a good pace over the years.

Valuation

To determine the valuation, I use the Graham Number, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here.

The Graham Number for XEL with a book value per share of $20.78 and TTM EPS of $1.91 is $29.88.

XEL's average yield over the past five years was 4.17% and over the past 10 years was 4.35%. Based on the current annual payout of $1.28, that gives us a fair value of $30.70 and $29.43 over the 5- and 10-year periods, respectively.

The average 5-year P/S is 1.30 and average 10-year P/S is 1.11. Revenue estimates for next year stand at $24.23 per share, giving a fair value of $31.50and $26.90 based on 5- and 10-year averages, respectively.

The consensus from analysts is that earnings will rise at 4.68% per year over the next five years. If we take a more conservative number at 4.5%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $34.38.

The following charts from F.A.S.T. Graphs provide a perspective on the valuation of XEL.

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(Source: F.A.S.T. Graphs)

The chart above shows that XEL is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be flat, confirming that the valuation is high.

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(Source: F.A.S.T. Graphs)

Conclusion

Electric utilities in general have seen slower sales industry-wide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. Coupled with the new regulations from the US government to reduce carbon emissions, electric utilities have started focusing a shift away from dirty fuels such as coal. XEL relies heavily on the electric utility business segment - making 90% of the company's earnings. As we've seen with other companies in the sector, this is resulting in falling revenues and competitors have resorted to buying natgas infrastructure assets. XEL needs a similar approach. Earnings are expected to grow at 4.68% over the next five years according to analysts and dividend growth is targeted to be in the range of 5-7% CAGR, although it might fall closer to its 5-yr and 10-yr average of 4.1%. The company appears slightly overvalued based on the valuation metrics used above. If we give equal weight to all metrics used above, we get a fair value of $31.74. An added risk for investors is the rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer in a rising rate environment and investors should remain cautious.

Further Reading

Be sure to check out other stocks analyzed in this sector

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.