Great Plains Energy Inc.: A Heartland Utility With a Hearty Dividend

Includes: GXP, ILA
by: Hilary Kramer

If you are looking for a reliable company that is currently undervalued, Great Plains Energy Inc. (NYSE:GXP) might be perfect.

GXP is a power company that gets almost all of its revenues from Kansas City Power & Light; this is a regulated business with highly predictable demand, and, not surprisingly, GXP has seen its revenues climb steadily over the past few years.

As an investor, you can rest assured that GXP will enjoy similar growth in the coming years, especially given its commitment to invest in its production capabilities, which will enable it to supply enough electricity for growing populations and growing demand. GXP is also in the process of acquiring Aquila (ILA), a Kansas City power company; this acquisition will help boost supply and will be an easy merger to navigate given that it operates in similar territories. I am betting that the company's stock could pop once that merger is complete and Wall Street sees the results - a well-managed organization that has integrated the assets of this newly purchased business.

In addition to being a reliable generator of revenues, GXP is also appealing for a few other reasons. It has a wide range of energy sources, from coal to natural gas to wind, which will enhance its stability. GXP is also widely respected for its openness to green technology, and it recently agreed to the Sierra Club's demands for several modifications to a new coal-fired plant. It's a well-managed company, which is a large part of why GXP won the 2007 Edison Award, a prize given to top energy companies each year.

On top of all that, GXP also offers a very nice dividend yield of 5.6%, which will enhance your profits and protect you against the downside.

If there are any concerns about GXP, it's that the company can see its profits diminished by rising fuel costs. The company hasn't had any fuel-adjustment clauses in the past -- these clauses allow power companies to raise their rates to compensate for rising fuel costs -- and so profits for 2006 were down, despite rising revenues. But there are reports that GXP will be able to adjust for fuel costs in its new contracts, and the company is still generating profits nonetheless.

Some analysts also worry about Strategic Energy, a subsidiary of GXP that buys wholesale electricity and sells it at retail prices. Wholesale prices have been up recently, and Strategic Energy hasn't been delivering high profits. It's also a highly competitive business, which means it will be hard to improve much. But this is such a small part of GXP (less than a fifth) that I don't think it should concern investors.

Type of stock: A Midwestern power company with steady revenue growth.

Price target:
GXP's price has dropped since May, which may be due to a larger sell-off of utilities. Its price is artificially low right now, and with the dividend to protect you on the downside, I'd buy GXP now while it's still below $30.

GXP 1-yr chart: