Utility Sector Dividends: A Long Wait For Paybacks

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 |  Includes: AEP, AT, BIP, CMS, CNP, DTE, ENI, EXC, LG, NEE, PEG, POR, PPL, UNS, WEC
by: Dividend Dog

Even though the utility sector is a favorite among dividend investors, the payback periods of these stocks are too long to justify focusing on dividends alone. Unfortunately, the hope that dividend investors should "buy, forget, and cash the check" is fantasy, since the shortest payback periods for utility stocks are projected to be longer than a decade.

Utility stock payback period calculations

The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)

Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback based on dividend payments could take.

Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:

  • Earnings growth over the past five years
  • Analyst estimates for earnings growth for the next five years
  • Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years.

Utilities were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield, and payout ratios below 60%. The values of these inputs are provided below:

Ticker

Company

Div Yield

Payout Ratio

EPS growth past 5 years

EPS growth next 5 years

AEP

American Electric Power Co.

4.78%

56.24%

-0.80%

4.07%

AT

Atlantic Power Corporation

7.98%

18.75%

-7.26%

-3.20%

BIP

Brookfield Infrastructure Partners

4.86%

31.99%

54.30%

6.00%

CMS

CMS Energy Corp.

4.44%

52.11%

13.09%

6.05%

CNP

CenterPoint Energy, Inc.

4.28%

43.12%

9.63%

5.89%

DTE

DTE Energy Co.

4.36%

54.42%

19.26%

3.61%

ENI

Enersis S.A.

4.10%

38.79%

31.25%

6.90%

EXC

Exelon Corporation

5.27%

56.32%

9.79%

1.76%

LG

Laclede Group Inc.

3.96%

56.10%

5.81%

5.15%

NEE

NextEra Energy, Inc.

3.64%

48.32%

7.27%

5.71%

PEG

Public Service Enterprise Group

4.49%

51.83%

12.39%

2.50%

POR

Portland General Electric Co.

4.22%

54.55%

10.15%

5.68%

PPL

PPL Corporation

4.92%

54.40%

4.06%

5.20%

UNS

UniSource Energy Corporation

4.43%

54.12%

14.43%

3.00%

WEC

Wisconsin Energy Corp.

3.50%

47.15%

10.54%

7.60%

Click to enlarge

Abnormal growth will not last forever, and analysts' estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)

Many utility sector stocks have distribution rates which are so high that the sum of future dividends would equal your initial investment inside of two decades:

Ticker

Industry

P/E

P/B

Return on Equity

Payback Period

AEP

Electric Utilities

12.06

1.3

11.09%

18

AT

Electric Utilities

5.41

2.58

7.46%

14

BIP

Electric Utilities

10.14

1.44

25.69%

15

CMS

Electric Utilities

14.05

1.79

13.74%

16

CNP

Diversified Utilities

10.45

1.92

21.18%

17

DTE

Electric Utilities

12.88

1.31

10.47%

18

ENI

Foreign Utilities

12.42

1.51

12.19%

17

EXC

Diversified Utilities

10.62

1.84

17.86%

16

LG

Gas Utilities

14.32

1.6

11.45%

18

NEE

Electric Utilities

13.15

1.71

13.08%

19

PEG

Diversified Utilities

11.56

1.52

13.56%

18

POR

Electric Utilities

13.22

1.15

8.83%

18

PPL

Electric Utilities

10.78

1.52

14.25%

16

UNS

Electric Utilities

13.46

1.57

13.20%

18

WEC

Electric Utilities

15.72

1.98

13.21%

19

Click to enlarge

Conclusion

If you want to ignore what prices your securities fetch in the markets, you will be waiting a long time to get paid back. Since all the dividend utility stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing in utilities.

What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check", they are stuck considering total return including capital appreciation. Fortunately, many of these stocks offer compelling low price-multiples, which are promising for future stock prices. However, to avoid value traps, investors should weigh how cheaply these dividend-paying stocks are trading against measures of quality. In short, prudent investment for income requires more than reading a stock's yield.

Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

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