Most investors buy electric utilities for their dividend yield and relative safety and stability. I, too, find myself in this boat. Over the past year, I've been mostly in cash due to the economic instability around the world. While we face many uncertainties, I believe now is a good time to buy domestic utilities and financial preferred stocks for income.
During my research, I whittled down my list to the following four utility companies. While one company listed below is standing out by undergoing expansion by adding another reactor, the three other companies are facing stiff headwinds such as regulation hurdles, stalled mergers, and high share price levels. I will look at four electric and combined cycle utilities and recommend only one that in addition to a yield, has a good chance for growth as well. The reason I like this one company is due to its bet on nuclear. Though uranium prices are still stalling and safety is at the front of investors' minds, I believe the USA will undergo a dramatic increase in nuclear energy production over the coming years. My favorite stock below benefits from this trend. Please use my research as a starting point for your own due diligence.
DTE Energy, Inc. (DTE)
DTE is a holding company, whose chief assets are Detroit Edison electrical utility, and Michigan Consolidated Gas Company. DTE also owns some non regulated businesses, chiefly a 200 mile natural gas pipeline. It has a trailing price to earnings ratio of 12.8, and a market capitalization of $9.1 billion. It pays dividends at the rate of $2.35 per year, for a yield of 4.4%.
DTE just announced a better than expected fourth quarter of 2011, as earnings came in at $150 million, or $0.88 per share. While these numbers were down less than 2% from the year ago period, they were up from the $0.80 per share analysts had predicted. Overall in 2011, earnings were $3.66 per share, meaning its dividend was an industry typical 64% of earnings. In all, DTE is a typical combined cycle utility. Yet there is a hitch. That is DTE's Fermi Nuclear Power Plant, near Monroe, Michigan. Perhaps emboldened by Southern, Inc.'s (SO) success in obtaining a permit to construct a new nuclear power facility in Georgia, DTE is marching ahead with a plan to expand its Fermi plant with another reactor. DTE management sees earnings in 2012 to be within 15 cents of $3.80 per share. DTE is a quality utility for income and potential growth. I could potentially pick up shares of DTE this quarter.
Hawaiian Electric Industries, Inc. (HE)
Hawaiian Electric is an intriguing company. It is not just a leading utility, serving nearly 95% of Hawaii's citizens; it also owns American Savings Bank, among the largest banks in Hawaii. This helps to balance out revenues and earnings to some extent, and provides the utility with a source of funds for its and its customer's needs. It is trading at a price to earnings ratio of 17.8, and has a market capitalization of about $2.5 billion. It has paid a quarterly dividend of $0.31 per share consistently since 1998; the current yield is 4.7%
Hawaiian Electric posted a solid year of growth and profitability in 2011. Income for the year ended at $138.2 million, or $1.44 per share, a solid 16% gain from the 2010 earnings. Both the utility and the bank performed well. The bank, for instance had an excellent year, supplying $60 million of the annual earnings, boasted a 1.23% return on assets, and a reasonable 64% efficiency ratio. Its performance will improve as loan growth picks up with the Hawaiian economy. The utility operations are benefiting from a state of Hawaii initiative to decouple revenues from volumes. Profit growth should further advance in 2012 as it is the first year of the uncoupled rate system.
Hawaiian Electric is making sizable investments in renewable energies
like solar, wind, and geothermal, all of which its footprint has in abundance. There is much to like about Hawaiian Electric. But the stock is up so high that its price to earnings ratio is well above both the average utility company, and the average banking company. I believe 2012 and 2013 earnings advances are already priced into the stock, and I will need to see a drop into the $20 per share range to be interested in this equity.
Duke Energy Corporation (DUK)
Duke is a major eastern and Midwestern utility company, with some international utility business, and a non regulated, phone and internet service provider in parts of the southeast. It is trading at a price to earnings ratio of 15.4, and a market capitalization of $28.3 billion. It pays a current quarterly dividend of $0.25 per share, for an annual yield of 4.7%.
Duke had a successful end to a fairly successful year. In the fourth quarter of 2011, Duke reported adjusted earnings of $0.24 per share, up from an adjusted $0.21 in the same quarter of 2010. For all of 2011, adjusted earnings were $1.46 per share. Duke is forecasting 2012 earnings of $1.40 to $1.45, and that number assumes that Duke's long sought after merger with Progress Energy, Inc. is not completed. Duke is doing little more than treading water, and therefore has a five year estimated PEG of nearly 4. While its dividend is generous, that dividend can be achieved in other utilities with at least the chance of some growth. All bets are off if the merger is allowed to proceed, but that is not assured at this time.
Progress Energy, Inc. (PGN)
It seems inappropriate to write about Duke without also writing about Progress. It is also based in North Carolina, and it has regulated utility businesses in the Carolinas, and in Florida. Its stock was trading recently at about $54 per share. Its 52 week range is from $56.39 to $42.05, and it has a trailing price to earnings ratio of 18.3. Progress has a market capitalization of $20.6 billion, and pays a quarterly dividend of $0.62 per share, for an annual yield of 4.5%.
Progress' earnings were solid, if uninspiring, in 2011. Earnings for the year, after excluding one time events, came in at $871 million, or $2.95 per share. This was about a 3% decline from 2010's $3.06 per share. Fourth quarter earnings declined from $133 million in 2010 to $114 million in 2011 and the company blamed the disappointing quarter on milder than typical weather throughout its footprint.
The real news for Progress is its planned acquisition by Duke in a $13.7 billion deal. Regulators have put up some hurdles before approving what would become America's largest utility. While I am confident the deal will ultimately be approved, Progress on its own is forecast to earn $3.19 per share in 2012, and its 5 year PEG is forecast at dismal 5.6. Management's focus is clearly on the merger, and I have the sense that actual growth of Progress is not the main issue for now. I would avoid Progress Energy for the time being.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DTE over the next 72 hours.