Utility companies were the best performing sector in 2011 with fifteen percent returns as investors looked for a safe haven from the global economic turmoil. I have been investing in high yielding utilities such as Consolidated Edison (ED) for years for both income and capital appreciation. For further details on the dividend capture strategy please consult my latest article on the topic.
To focus on these opportunities I ran a screen with a focus on relative safety for the investments. I began with a specification of utility companies with dividend yield greater than four percent and an ex-dividend date within the next week. To provide some layer of safety I narrowed down the environment by looking at companies with market capitalizations greater than $1B, PEs between zero and 20, and institutional holding percentage of at least 25 percent. While not a precise requirement, I prefer companies that have underperformed the S&P 500 in the last 52 weeks as it indicates limited downside relative to peers. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- PE Ratio: 0-20
- Institutional Ownership ≥ 10%
After applying this screen I arrived at the companies discussed below. Although I envision these as short-term trading ideas, you still need to be careful. The information presented below should simply be a starting point for further research and should not be taken as a recommendation. My goal is to present new companies to you and provide a brief overview of their recent developments and this should not be considered a substitute for your own due diligence.
Public Service Enterprise Group (PEG): 4.61% Yield - Ex-Dividend 3/7
Public Service Enterprise Group is predominately a utility that services New Jersey and has approximately four million customers. In addition PEG has subsidiaries that generate power, invest in alternative energy, and provide energy solutions to business customers. PEG was hit hard by a decline in realized energy and capacity prices. Since this is not just a typical customer servicing utility, different segments of it require through analyses. PEG also recently announced a 3.6% increase in the dividend and management hinted at plans to increase the dividend more in the future.
Pepco Holdings, Inc. (POM): 5.54% Yield - Ex-Dividend 3/8
Pepco Holdings operates in Maryland, Delaware, and Washington DC and services approximately two million customers. While Pepco is around the middle of the pack in terms of market capitalization, it sports the highest yield of the screener results at over 5.5%. Pepco recently reported that earnings nearly doubled from 2010; however, non-GAAP earnings were essentially flat. The reason for this was that there was a $113M debt extinguishment charge last year significantly skews comparisons. Anytime you see a significant change in earnings for a sleepy utility company it should be a catalyst for further research.
PPL Corporation (PPL): 5.04% Yield - Ex-Dividend 3/7
PPL is not just a utility company in the United States, it is a global energy holding company with significant interests in the United Kingdom. Most people do not know that PPL Global services 7.7 million customers in the UK, compared with the "only" 2.7 million customers in the United States. For this reason it is unsurprising that PPL is one of the largest utility companies and has the highest market capitalization out of the screener results. In spite of that, PPL still generates nearly 40% of earnings from energy supply (PPL Generation) as opposed to its customer servicing business. For a more detailed breakdown of the company's segments please review the organization structure. Over the past year earnings per share have grown nearly 25% yet the PE has fallen from 12.1 to 10.5. Dividend growth reveals a mixed picture as TTM payout ratio has declined from 65% to 52% but it has actually risen six percent in terms of ongoing operations. A 50% payout ratio is quite conservative so PPL certainly has room to break out of the dividend stagnation that it has chosen since 2009.
SCANA Corporation (SCG): 4.43% Yield - Ex-Dividend 3/7
SCANA Corporation is another energy based holding company; however, SCANA is much more typical in that the majority of earnings relate to serving customers. SCANA has diversified interests into telecommunications and fiberoptics technologies but over eighty percent of earnings relate to its South Carolina Electric & Gas Company. Recently reported 2011 earnings were flat compared to 2010 as costs increases matched increased revenues in many markets. Earnings from the Georgia segment declined nearly 25% due to milder weather and a customer decrease of 1.9%. The dividend payment was recently increased 2.1% effective for dividends payable April 1, 2012. This is one of the trickier geographies for utility companies because weather swings can be more volatile so I suggest considering other utility companies for an investment.
UIL Holdings Corporation (UIL): 4.92% Yield - Ex-Dividend 3/8
UIL is diversified energy delivery company that services Connecticut through various electrical and natural gas subsidiaries. GAAP earnings rose approximately ten percent but an equity issuance had a dilutive impact on EPS. UIL has a multitude of nonrecurring events that cloud the earnings analysis picture such as large tax events so I urge a more detailed analysis before making a decision. As with SCANA, UIL can be subject to more volatility related to weather that other geographical regions do not face as much. With a PE of 18 and the highest relative performance against the S&P 500 in the last year I would look elsewhere for a safe dividend payer.
UniSource Energy Corp. (UNS): 4.63% Yield - Ex-Dividend 3/8
UniSource is a predominated regulated utility company with fewer than 500,000 customers in the Arizona. UniSource has moved little since I screened it last quarter despite reporting 2011 earnings that declined slightly due to significant after-tax charges. The most alarming aspect of UniSource relates to the challenging troubles facing the economy of Nevada. According to Paul Bonavia, Chairman and CEO, "TEP is in the fourth year of a base-rate freeze. Frozen rates and an economy in the very early stages of recovery will constrain our financial performance in 2012. We will continue to focus on operational efficiencies to maintain tight control of our costs." UNS is eligible to apply for an increase after July 1st, 2012 but given the difficult economic climate of Arizona it is far from a certainty. In essence, there are safer bets for your money.
Westar Energy Inc. (WR): 4.77% Yield - Ex-Dividend 3/7
Westar Energy is the largest utility company in Kansas and services approximately 700,000 customers. Westar echoes a familiar theme as most utility companies have been recently: slight revenue increases were mostly offset by increases in operating expenses. GAAP earnings rose while non-GAAP earnings per share were flat. As with many of its peers, a tree percent dividend increase was announced with the full 2011 earnings release. In light of the recent tornados spiraling through the region, I would avoid Westar as a pure dividend capture play because of the elevated volatility in the name.
The information presented has been summarized below.
Disclosure: Author is long ED.