Allegheny Energy Has Turned The Corner

Oct.18.07 | About: Allegheny Energy (AYE)

On October 4, Allegheny Energy (AYE) reinstated their dividend after a five-year hiatus. The new dividend is 15 cents per share each quarter giving the stock a yield of just over 1%. The company has had an amazing turnaround under the leadership of Paul Evanson who joined the company in 2003 and has led the company from near collapse to a return to strong and consistent earnings growth and a recent upgrade to investment grade bond ratings by the major credit agencies.

Prior to Evanson's arrival the company made a series of failed investments in energy trading that nearly bankrupted the company. Evanson brought in an entirely new management team and a culture of cutting costs and refocusing the business to core operations. In the past three years, the team at Allegheny has cut long-term debt by more than $1.5 billion and has turned the company around to be significantly profitable with the prospect for strong growth going forward.

The dividend initiation is a further confirmation of my belief that this company has turned the corner and has become a fast-growing and well-managed utility that should greatly benefit from deregulation in the Middle Atlantic utility market which will allow the company to significantly increase profits and prices in the next few years.

The company has one of the best top-line growth rates, operating margins and profitability growth rates in the industry. Yet, the stock is still trading at a discount to peers based on cash flows as well as on relative PEG ratio metrics.

Disclosure: Author is long AYE