Utility companies were the best performing sector in 2011 with 15 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. Utility companies are excellent investments because they are generally stable, cash-cow businesses that return most profits to investors via dividends and share repurchases. Larger companies enjoy scale benefits and are able to profit more from smaller rate increases. While geographical differences exist for regional utilities, the underlying business is essentially the same. To provide some layer of safety I narrowed down the environment by looking at companies with market capitalizations greater than $1B, P/Es 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. The "yield price" metric is calculated by dividing the P/E ratio by the dividend yield and attempts to gauge the value of the dividend. A low yield price indicates that you have an affordable priced stock given its yield. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- P/E 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 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.
Pepco Holdings, Inc. (POM): 5.57% Yield - Ex-Dividend 9/6
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 and P/E of the screener results at nearly 5.6% and 19, respectively. Pepco recently reported that earnings nearly doubled from 2010; however, non-GAAP earnings were essentially flat. Last year's results included a $113M debt extinguishment charge which significantly skews comparisons. Anytime you see a significant change in earnings for a sleepy utility company it should be a catalyst for further research.
PPL Corporation (PPL): 4.90% Yield - Ex-Dividend 9/6
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 continued to grow yet the P/E has fallen to 10.0. Dividend growth reveals a mixed picture as TTM payout ratio has declined from 65% to 48%. A 50% payout ratio is quite conservative so PPL certainly has room to break out of the dividend stagnation that has persisted since 2009. PPL is my top pick this week based upon its size, customer base, yield, and low P/E. PPL also has the lowest yield price by a wide margin as it has the second highest yield with the lowest P/E.
Public Service Enterprise Group (PEG): 4.46% Yield - Ex-Dividend 9/5
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 lower energy prices for energy and capacity, a problem that continues to plague the company. 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 payout ratio still sits slightly above 50% but management will have trouble growing the dividend if earnings continue to slide.
Westar Energy Inc. (WR): 4.51% Yield - Ex-Dividend 9/5
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. Westar has started off fiscal 2012 with a 4.5% increase in revenue and 19.4% increase in net income. As with many of its peers, a three percent dividend increase was announced and currently remains in effect. 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): 4.15% Yield - Ex-Dividend 9/6
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 fiber optics technologies but over eighty percent of earnings relate to its South Carolina Electric & Gas Company. Recently reported first half 2012 earnings have improved versus comparable 2011 earnings despite revenue declines as the company has been able to successfully control costs. Mild weather trends continue to drag the top-line down but should eventually reverse. The dividend payment was increased 2.1% and could be raised further in the future if rates are increased. The company filed for a 2.5% rate increase while the company is building its nuclear operations and shuttering coal-fired plants. The company recently won approval to build nuclear reactors, joining the Southern Company (SO) as one of only two companies to receive approval in years. 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.
The information presented has been summarized below.