Vectren Corporation (VVC) is a utility company that has failed to deliver adequate investment returns for share holders. In this article I will highlight the negative total annualized rate of return versus its peers. Vectren has provided share holders an annual rate of return of 4.7% for the past 5 years. My focus will highlight the mediocre returns and alternative energy companies to invest in.
Vectren is an energy holding company with subsidiaries focused on utility and non-utility businesses. Its utility businesses focus on gas and electricity sales to over 1.1 million customers in Indiana and west central Ohio, and accounted for 87% of its net income in 2011 (split equally between gas and electricity). Its non-utility businesses are involved in pipeline infrastructure services, energy services, coal mining and sales, and gas and energy marketing.
Vectren's goal is to grow utility earnings at a stable and not overly aggressive rate of 3% per year, which seems like a realistic goal, roughly in line with inflation and population growth trends. Its utility business strategy also includes aggressively managing expenses, strategically outsourcing non-core services, reinvesting earnings to the extent necessary for growth, and reducing external financing needs.
On the non utility side, it plans to invest in infrastructure and energy services, reopen and ramp up production at existing coal mines and improve profitability where possible.
For its fiscal year ended, December 31, 2011, Vectren reported total revenue of $2.3 billion of which $819.1 million was from its gas utility business, $635.9 million from electricity and $870.2 million from its non-utility group. Vectren's full year net income was $141.6 million, 87% of which came from its gas and electric utility groups. Earnings per share were $1.73, 5.5% higher than 2010. Cash from operations was $416.9 million, 8.3% higher than 2010.
Vectren reported cash of only $8.6 million (rather small relative to its earnings base), total assets of $4.9 billion, $1.56 billion in long-term debt and $1.47 billion in shareholders' equity.
Vectren has raised annual dividends consecutively over the past 52 years, albeit by small amounts. It currently pays 35 cents per quarter ($1.40 annually, with a current dividend yield of 4.7%). Vectren has a payout ratio of 80% which leaves little room for significant dividend increases.
As of mid-February 2012, Vectren's market capitalization was $2.43 billion (1.6x Book Value) with shares trading near $29.50, with a 52-week range of $23.65 to $30.69. Vectren's shares have consistently risen over the years and are now near all-time highs.
Vectren's peer group includes other regional electric and gas utilities in the U.S. with significance presence in a few select states. Peers include Western Gas (WES), Atmos Energy (ATO), Piedmont Natural Gas (PNY), and Southern Company (SO). Within its peer group, Vectren's 4.7% dividend is higher than the average of 3.5%.
Western Gas Partners
Western Gas Partners operates midstream energy assets in Texas, and the Rocky Mountains. The midstream operations are gathering, compressing, processing, natural gas and oil for Anadarko Petroleum.
This is a different sector than the regulated utility sector. The midstream business model is a toll booth business model. The 34.1% total annualized rate of return over 5 years is very impressive. The distributions have increased dramatically versus the typical utility company.
I would recommend investors accumulate shares of Western Gas Partners as prices below $40 per unit. This will provide a higher yield on cost.
Atmos Energy Corporation
Atmos Energy is engaged in the sale and natural gas to over 3 million customers. These customers are located in regulated ares for the following clients: Louisiana customers, west Texas customers, middle Texas customers, Mississippi customers, Colorado and Kansas customers, and Kentucky customers.
Atmos should be avoided by income investors. The 4.3% dividend yield is a mediocre utility yield. The current dividend is lacking growth opportunities. Atmos has non regulated natural gas exposure. Natural gas prices are currently trading near 12 year lows. This will place pressure on Atmos' non regulated natural gas revenues. This could negatively impact earnings and dividends.
Piedmont Natural Gas
Piedmont Natural Gas distributes natural gas to residential, commercial, industrial, and assorted customers in N. Carolina, S. Carolina, and N. Carolina. The dividend has not increased at a significant rate. The company does not offer catalysts for higher earnings such as competitor Southern Company.
I recommend avoiding these shares. The yield is not compelling for new investors. There are plenty of alternative investments with higher yields.
Southern provides electricity to over 4 million customers. Georgia, Alabama, Florida, and Mississippi. Southern did receive positive news with approval of a construction and operating license from the Nuclear Regulatory Commission. Gulf Power is expected to gain rate relief, which should provide an earnings boost to Southern's 2012 and 2013 bottom line.
Southern Company is a buy for conservative investors. Catalysts are in motion for higher earnings per share and dividends should follow suit.
Vectren is a utility with a strong regional focus. It plans to grow its utility business at a modest 3% clip. Shares are currently at all time highs. As such, Vectren does not appear to currently offer significant share appreciation potential barring a potential acquisition by a bigger regional rival, which is always a possibility given that it's not too large to be acquired. Its dividend yield is moderately attractive, and all things considered, investors might want to sit this one out for now.
I recommend investors avoid Vectren shares. Identify utility and other sector stocks with solid dividend yields and prospects for increasing dividends in the future. Vectren has failed over the past 5 years to provide average investment returns when compared to its utility peers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.