In these trying times, it seems you cannot be sure if your investments will be far up or far down when you wake up each day. The EU is slowing -- some of its countries are already in recession. China is slowing. The Bank of China estimated that GDP growth for Q2 was +7.6%, down from +8.1% in Q1 2012. This is rapid slowing. Countering this, there was some short-term good news that the EU had approved a 120 billion euro growth plan. It also agreed to use of the EFSF and ESM to prop up the banks and sovereign currencies of its members. This may be kicking the can down the road, but it could cause a short-term market fluctuation upward. It is very hard to predict what the complex world economic miasma will bring to the fore next. With this in mind, it is reassuring to put your money in steady, boring utilities that pay good dividends such as Wisconsin Energy (WEC) -- a steady 3.03% dividend.
WEC generates electricity, and it distributes both electricity and gas. As of Dec. 31, 2011, it had approximately 1.1 million electric customers in Wisconsin and Michigan. It has approximately 1.0 million gas customers in the same states. These states get hot and muggy in the summer, and they get extremely cold in the winter. Not many people want to skimp on the energy needed to cool or heat their homes. WEC has a truly captive constituency. In a recession, people might cut back a little, but it will be very little. WEC also invests in commercial real estate in southeastern Wisconsin.
At first glance, WEC may seem like its dividend is a bit small for a utility. However, it increased its dividend by 15.4% from 2011. WEC plans to trend toward a 60% payout ratio in 2014. This means it should have double-digit dividend increases from 2012 to 2014.WEC plans for EPS growth of 4%-6% during this time. On top of this, WEC has a stock repurchase program. It has already bought back $100 million through March 31, 2012. It plans to buy back $300 million total by the end of 2013. This should help the stock price rise as it amounts to about 3.3% of the stock at the current price.
WEC has a plethora of projects that will need to be done in the near future. Only a small number of these are currently active. Many of these will be upgrade or replacement projects. It should be able to recoup all such monies from its customers.
The following charts of its electricity customer base gives one an idea of how much revenue may be at risk during a slowdown/recession.
Click to enlarge images.
Commercial and Industrial are by far the largest users of WEC's energy, although residential users do provide 39% of the revenues. The following table more clearly breaks out the commercial and industrial use of electricity.
The mining, primary metals, and paper and products sectors seem like they might be the most susceptible to cyclical forces. These are not areas of huge worry. They are just risks you should be aware of if you are a more short-term investor. If the U.S. is heading into a recession, even stalwart WEC may see downward pressure on its stock in the short term. However, in the longer term it has recovered quickly in the past, and there is no reason to think that it would do otherwise after a new U.S. recession. Meanwhile, you get to collect a good dividend with the assurance that WEC has a captive clientele.
WEC is currently involved in two major projects: the construction of a 50-megawatt biomass plant in Northern Wisconsin, and an air quality control upgrade for the older coal fired units. The first should grow generating capacity. This should help future earnings. The second should help to keep WEC in the good graces of the "green" groups, which is politically important to smooth future operations.
The two-year chart of WEC below shows it has been in a consistent uptrend for the last two-plus years.
The slow stochastic sub chart shows that it is near overbought levels at this time. The main chart shows that the price line is firmly above the 50-day SMA. The 50-day SMA is itself far above the 200-day SMA. The previous two years of chart tell you that you probably want to wait for WEC to come back to its 50-day SMA or below to buy. Averaging in can be a good strategy. The company may have suffered from a warmer than normal winter, but the summer has also been a warm one so far. In fact the dry hot weather is starting to negatively impact many central U.S. crops. This may not bode well for the crops, but it bodes well for WEC's summer revenues, which stem significantly from air conditioning energy needs.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WEC over the next 72 hours.