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 market 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. 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 and provide a brief overview of their recent developments. This information should not be considered a substitute for your own due diligence.
(Source: Seeking Alpha)
Due to the volume of potential energy ex-dividend opportunities this week you should essentially be looking for reasons to not invest in certain companies. I have segregated the equities between natural gas utilities and more traditional utilities.
Natural Gas Utilities:
DCP Midstream Partners, LP (DPM): 6.06% Yield; Ex-Dividend 11/5
DCP Midstream Partners is a midstream master limited partnership (MLP) that engages in all aspects of midstreaming natural gas including gathering, compressing, processing, transporting, storing, shipping, and selling. As a MLP the partnership is required to distribute most earnings to investors in order to receive preferential tax treatment. DCP Midstream is jointly owned by Spectra Energy (see below) and Philips 66 (PSX).
DPM is the smallest utility company this week but is the leader in numerous financial categories. The partnership is growing revenue at a staggeringly high 17.5% rate and has a similar return on equity. Furthermore, the company has the highest yield by more than one-hundred basis points. I tend to stay away from the smaller companies but DPM is a winner this week. As MLP investors know, the risk of a high dividend payout ratio (90+%) is significantly mitigated due to the distribution requirements and is a far less meaningful metric than for traditional dividend payers.
Spectra Energy Corp. (SE): 4.35% Yield; Ex-Dividend 11/7
Spectra Energy Corp. is a natural gas infrastructure company that specializes in the gathering processing, transmission and storage, and distribution of the commodity. Spectra Energy Corp. also has a fifty percent ownership of DCP Midstream; therefore, has a significant interest in DPM. Spectra Energy Corp. also has an ownership interest in Spectra Energy Partners LP (SEP), which I covered last week. Spectra recently announced a significant 8.9% dividend increase which follows the company's recent third quarter revenue and earnings misses. The misses are not overly troubling as the earnings release detailed many expansionary projections that should improve earnings going forward. The dividend hike also strengthens my belief that management is confident about the future.
FirstEnergy Corp. (FE): 4.95% Yield; Ex-Dividend 11/8
FirstEnergy is a diversified, regulated energy company that services six million customers in the Mid-Atlantic. FirstEnergy has the lowest return on equity but is one of only two utility companies in the group to have positive revenue growth. FirstEnergy is the parent company of Jersey Central Power & Light which is still dealing with the aftermath of Hurricane Sandy. Currently the majority of its customers are still without power and early estimates are that restoration will not occur until November 7. FirstEnergy may be a decent utility opportunity in the future but cannot be used for dividend capturing for at least this quarter. Most of FirstEnergy's customers are not located in the disaster region but the extra downward pressure related to the storm will likely remove any profitable dividend capture opportunity.
TECO Energy, Inc. (TE): 4.94% Yield; Ex-Dividend 11/8
TECO is a diversified utility company with interests in Florida, Kentucky, Virginia, and Guatemala. The Florida regulated utility services approximately one million customers while Kentucky and Virginia interests focus on coal mining. As you can see from the chart above, TECO is a relatively average company. Third quarter earnings beat analysts' estimates despite revenue declining year-over-year.
Entergy Corporation (ETR): 4.66% Yield; Ex-Dividend 11/6
Entergy is an integrated electrical utility company that services 2.8 million customers in the Southern and Central United States. This is a favorable geographic climate that is warm enough to keep revenues predictable but lacks the extreme temperature swings that can cause damage to equipment. Entergy is the cheapest utility stock this week on a forward P/E basis and is tied for the lowest payout ratio. With a 59% payout ratio the company can afford to increase its yield closer to the five percent range, which would make it one of the more attractive utility offerings given its price.
American Electric Power Company, Inc. (AEP): 4.25% Yield; Ex-Dividend 11/7
American Electric Power is one of the nation's largest utility companies with 5.3 million customers in the Southern and Central United States. AEP is very similar to Entergy in terms of its geographic region and payout ratio but is more expensive with a lower yield. With a very low beta (.32) AEP is your typical ex-dividend play.
Consolidated Edison, Inc.: 4.09% Yield; Ex-Dividend 11/9
Consolidated Edison ("ConEd") is one of the largest utility companies in the New York tri-state disaster area and faces the largest cleanup effort in its history. The company will face millions in expenses and face substantial lost revenue. ConEd has already successfully restored power to hundreds of thousands of customers but the more difficult areas will take another week to repair damaged overhead wires. I have been long ConEd for years due to its impressive capital gains and dividends but the opportunity has become less appealing as the yield has declined to nearly four percent. I took the opportunity last week to sell covered calls to provide some protection to my position.
The information presented has been summarized below. Yellow and red represent "avoid" and "consider" classifications, respectively.
Disclosure: I am long ED.
Additional disclosure: Author is short ED December $60 Calls. Please refer to profile page for disclaimers.