When investors think up investment ideas holding exciting, untapped possibilities, 'utilities' is not the first idea that comes to mind. But because it is often the overlooked sectors that can reap the highest rewards, today we focused on stocks in the utility arena, particularly on those that pay handsome dividends back to investors. When looking for smart utility picks today, we implemented one of the key principles of fundamental analysis: a focus on profitability. With this idea in mind, we searched for profitable utility companies that also have strong analyst ratings, which can indicate that the companies perform well due to a variety of other reasons beyond profitability. Concluding our search, we derived a short list that warrants further investigation and due diligence.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability.
Net Margin = Net Income/Total Revenue
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
We first looked for utility dividend stocks. Next, we then screened for businesses that analysts rate as "Buy" or "Strong Buy" (mean recommendation < 3). We then screened for businesses that have achieved strong bottom line profitability (Net Margin [TTM]>10%)(1-year operating margin>15%). We did not screen out any market caps.
Do you think these stocks will go up in price? Use our screened list as a starting point for your own analysis.
1) Middlesex Water Co. (MSEX)
Middlesex Water Co. has a Dividend Yield of 3.88%, a Payout Ratio of 92.48%, an Analysts' Rating of 2.30, a Net Margin of 12.36%, and an Operating Profit Margin of 23.11%. The short interest was 2.99% as of August 12, 2012. Middlesex Water Company owns and operates regulated water utility and wastewater systems in New Jersey, Delaware, and Pennsylvania.
The company engages in collecting, treating, and distributing water for domestic, commercial, municipal, industrial, and fire protection purposes; and operating municipal water and wastewater systems under contract. It offers water and wastewater services; water treating and pumping services; and water service line and sewer lateral maintenance programs. The company provides water services to approximately 60,000 retail customers primarily in central New Jersey; 36,000 retail customers in New Castle, Kent, and Sussex counties of Delaware; and 120 retail customers in the township of Shohola in Pennsylvania, as well as offers wastewater services to approximately 2,200 residential retail customers.
2) National Grid plc (NGG)
National Grid plc has a Dividend Yield of 5.76%, a Payout Ratio of 68.81%, an Analysts' Rating of 2.00, a Net Margin of 14.73%, and an Operating Profit Margin of 25.08%. The short interest was 0.13% as of August 12, 2012. National Grid plc engages in the transmission and distribution of electricity and gas in Great Britain and northeastern United States.
The company operates high voltage electricity transmission networks and gas transmission network in Great Britain; gas distribution system in the United Kingdom; regulated gas distribution networks, electricity distribution networks, and high voltage electricity transmission networks in New York and New England; electricity generation facilities in New York; and liquefied natural gas (LNG) storage facilities in the United Kingdom. It also owns electricity interconnector in France and the Netherlands; and a 224 kilometer transmission interconnector between England and Canada.
3) Westar Energy, Inc. (WR)
Westar Energy, Inc. has a Dividend Yield of 4.37%, a Payout Ratio of 67.09%, an Analysts' Rating of 2.30, a Net Margin of 11.39%, and an Operating Profit Margin of 23.48%. The short interest was 1.50% as of August 12, 2012. Westar Energy, Inc., an electric utility, engages in the generation, transmission, and distribution of electricity in Kansas. It produces electricity through various sources, including coal, wind, nuclear, natural gas, oil, and diesel. The company is also involved in energy marketing activities; and the purchase and sale of electricity in the wholesale market.
4) Connecticut Water Service Inc. (CTWS)
Connecticut Water Service Inc. has a Dividend Yield of 3.09%, a Payout Ratio of 71.82%, an Analysts' Rating of 2.20, a Net Margin of 15.32%, and an Operating Profit Margin of 32.19%. The short interest was 3.55% as of August 12, 2012. Connecticut Water Service, Inc., through its subsidiaries, operates as a regulated water company in Connecticut. It operates through three segments: Water Activities, Real Estate Transactions, and Services and Rentals. The Water Activities segment supplies public drinking water.
5) PPL Corporation (PPL)
PPL Corporation has a Dividend Yield of 4.81%, a Payout Ratio of 48.75%, an Analysts' Rating of 2.50, a Net Margin of 12.35%, and an Operating Profit Margin of 23.70%. The short interest was 3.27% as of August 12, 2012. PPL Corporation, an energy and utility holding company, engages in the generation, transmission, distribution, and sale of electricity to wholesale and retail customers in the United States and the United Kingdom. The company is involved in the distribution and sale of natural gas to customers in Kentucky. It also owns and operates renewable energy projects; and provides energy-related products and services to commercial and industrial customers.
6) American States Water Company (AWR)
American States Water Company has a Dividend Yield of 3.25%, a Payout Ratio of 44.55%, an Analysts' Rating of 2.40, a Net Margin of 10.90%, and an Operating Profit Margin of 23.27%. The short interest was 3.32% as of August 12, 2012. American States Water Company, together with its subsidiaries, provides water, electric, and contracted services in the United States.
It engages in the purchase, production, and distribution of water in 75 communities in 10 counties in California; and provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County, California. The company also provides water and wastewater services, including the operation, maintenance, renewal, and replacement of the water and wastewater systems to various military installations.
7) NextEra Energy, Inc. (NEE)
NextEra Energy, Inc. has a Dividend Yield of 3.44%, a Payout Ratio of 45.06%, an Analysts' Rating of 2.30, a Net Margin of 14.01%, and an Operating Profit Margin of 25.35%. The short interest was 2.04% as of August 12, 2012. NextEra Energy, Inc., through its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. The company is involved in the generation of renewable energy from wind and solar projects. It also generates electricity through natural gas, nuclear, oil and coal, and hydro power plants.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.