Jim Cramer recently released Cramer's Top Dividend Stocks 2012 in which he picked 16 dividend plays for a tough economy. The selection features some of the traditional dividend aristocrats such as Coca-Cola (KO), Abbott Laboratories (ABT) and Clorox (CLX). His picks also include three power utility companies that have very low betas and high dividend yields. Cramer recommends buying stocks of these utility companies not only to earn income but also to safeguard investments during the market downturn. While they represent defensive alternatives to the riskier equities during the market's downward spiral, some of these dividend stocks face near-term challenges that could limit their capital gains potential. The stocks are likewise generally priced above the industry and, in some cases, above the market's valuation.
American Electric Power Company (AEP) is an $18.5 billion power utility company providing electricity to customers in Texas and 38 eastern and central U.S. states and eastern Canada. This power utility pays a dividend yielding 4.9% on a relatively low payout ratio of 46%. The company has grown revenues at a 3.7% annual rate over the past five years, compared to the sector's growth rate of 14.11% per year. The utility grew its earnings per share [EPS] at a 5.4% annual rate, which compares to negative growth rates in the sector. American Electric Power Company is projected to grow its earnings per share by a modest average rate of 3.9% per year for the next five years. The stock is currently trading at $38.23 a share, down almost 6.3% year-to-date.
This power producer has taken advantage of low natural gas prices to substitute coal-based electricity production for natural gas-based one. That has helped reduce costs. However, the company is currently facing major hurdles in Ohio, which is in the process of deregulating its electricity market. The company's price plan was rejected by the Ohio regulator after citizens' complaints regarding the proposed price increases. Some are concerned that the company may need to relocate or sell generation assets in case it does not find an economically feasible solution with the Ohio regulators. Among fund managers, David Dreman held a small stake in the company in the end of first quarter of 2012; George Soros sold out his stake late last year.
FirstEnergy Corp. (FE) is a $19.6 billion electricity producer with 10 power-generating facilities servicing some 6 million customers in six U.S. states. The company pays a high dividend of 4.7% on a payout ratio of 81%. The company has seen its revenues increase by 7.2% a year over the past five years, slower than its peers on average over the same period. FirstEnergy saw its bottom line shrink by 10.5% a year over the past give years, much more than its sector as a whole (on average down 1.5% a year). However, the utility is forecast to boost its EPS by an average rate of 3.9% per year for the next five years. The stock is currently trading at $46.85, up some 9.4% from the beginning of the year.
The stock was downgraded last week at Jefferies to underperform from hold due to increased regulatory risks in Ohio and New Jersey jurisdictions. Also, while Fitch reaffirmed its rating on the company, it downgraded company outlook to negative from stable. The reasons cited for the downgrade include
an unusually prolonged downturn in power prices driven by a surfeit of natural gas supply, a tepid economic recovery," and a projected increase in "capital investment and operating costs
due to compliance with new Environmental Protection Agency (EPA) rules. First Eagle Investment Management, with a 3% stake in the company, remains bullish about the utility's prospects.
Duke Energy (DUK) is a $29.4 billion power utility servicing some 4 million customers in the United States. The company also has exposure to Latin America with power generation facilities in Brazil. Duke Energy pays a dividend yielding 4.6% on a payout ratio of 89%. The company has seen its revenues grow by 6.5% annually over the past five years, slower than its industry on average. Still, its EPS rose by 7.1% a year over the past five years, compared with a drop in the EPS for the industry and the power sector as a whole. Analysts forecast that the company's EPS will expand by a modest 4.2% a year over the next five years. The stock, which is up 1.6% from the beginning of the year, is currently trading at $21.96 a share or nearly double the E/P for the industry on average.
Recently, UBS upgraded the stock from neutral to buy, citing the
imminent merger (with Progress Energy (PGN)) resolution which would create a consolidated company with scale and value creation potential.
Still, there are some concerns. While Duke Energy has paid a quarterly dividend for 86 consecutive years, the company's dividend at current levels may be unsustainable given that the power utility has registered negative free cash flow each year over the past three years. Billionaire Mario Gabelli has a minor stake in the company; Jean-Marie Eveillard sold out his shares in the first quarter of this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.