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. This year many utilities have underperformed the S&P 500 and appear to be attractive investments. I have been investing in high yielding utilities such as Consolidated Edison (ED) 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 year-to-date as it indicates reduced downside relative to peers. With the impending European crisis I now pay additional attention to a company's geographical dependency and will avoid companies with significant European exposure. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- PE Ratio: 0-20
- Institutional Ownership ≥ 25%
After applying this screen I arrived at the equities discussed below. Although I envision these as short-term trading ideas, you still need to be exercise caution. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before you make any investment decisions. 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.
PPL Corporation (PPL): 5.26% Yield - Ex-Dividend 6/6
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 9.7. 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. PPL is my top pick this week based upon its size, customer base, yield, and low PE.
Public Service Enterprise Group (PEG): 4.55% Yield - Ex-Dividend 6/6
Public Service Enterprise Group is predominately a utility that services New Jersey and has approximately four million customers. In addition PSEG has subsidiaries that generate power, invest in alternative energy, and provide energy solutions to business customers. PEG was hit hard by declining in 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 announced a 3.6% increase in the dividend earlier this year and management hinted at plans to increase the dividend more in the future. The company is continuing its trend of passing along natural gas savings to customers and has proposed a 5.2% rate decrease for the fall. While reporting first quarter earnings, management reaffirmed its full year guidance.
UniSource Energy Corp. (UNS): 4.59% Yield - Ex-Dividend 6/6
UniSource is overall a regulated utility company with fewer than 500,000 customers in Arizona. 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 its most recently reported financials both revenues and earnings were weak and there has been minimal traction for the company. In essence, there are safer bets for your money.
Westar Energy Inc. (WR): 4.66% Yield - Ex-Dividend 6/6
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 three percent dividend increase was announced with the full 2011 earnings release. In addition to the recent dividend payment, the company announced that it will be redeeming outstanding preferred shares. This appears to be a reaction to this low interest rate environment and has minimal bearing on the dividend.
SCANA Corporation (SCG): 4.22% Yield - Ex-Dividend 6/7
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% and could be raised further in the future if rates are increased. This week the company filed for a 2.5% rate increase while the company is building its nuclear operations and shuttering coal-fired plants. 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.
Pepco Holdings, Inc. (POM): 5.67% Yield - Ex-Dividend 6/7
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 nearly 5.7%. 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.
The information presented has been summarized below.
Disclosure: Author is long ED.
Disclosure: I am long ED.