The utility industry trade publication Public Utilities Fortnightly published an interesting article in 2007 that is still worth reading. Most utility investors focus on the wrong fundamentals by concentrating on dividend yield. According to the information compiled by Public Utilities Fortnightly, there is a negative -73% correlation factor between utility dividend yield and 3-year total stock returns for their top 40 utilities. Return on Invested Capital (ROIC) and Return on Equity (ROE) have the highest correlation factor of 58% and 51% respectively.

The following figures outlines the correlations between ROIC, ROE, dividend yield and several other fundamental numbers used in evaluating stock values and 3-year total stock investment returns. Total returns include both capital gains and dividend income. In addition, the plot graph correlates specific returns on invested capital with total stock returns for the three-year period 2004 to 2006.

Source: Public Utilities Fortnightly, How to Achieve High

After the close on Wed, May 15, it was reported Berkshire Hathaway (BRK.B) had made an initial investment in Chicago Bridge and Iron (CBI). Using its 13-F filing with the SEC, BRK disclosed a 6.5 million-share investment during the first quarter 2013. Based on 108 million shares outstanding, BRK holdings represents a 6.1% ownership worth about $375 million as of the 5/15 close. The quarterly filing does not indicate which of the three portfolio managers made the decision - Warren Buffett, Ted Weschler, or Todd Combs. In addition, BRK increased its ownership of drilling rig manufacturer National Oilwell Varco (NOV), to a total of 7.5 million shares, or a 1.75% stake.

Chicago Bridge and Iron is an interesting mid-cap firm specializing in E & C, engineering and construction, of oil and gas infrastructure. Mainly focused on refineries, oil terminals, and LNG export/import terminals, CBI has a long history of making

Western Union (WU) is a powerhouse in the highly fragmented international money transfer business and has been transferring cash from one party to another for over 135 years. The company generated a trailing 12 month Return on Invested Capital of 21.75% and a five year average ROIC of over 40%. The firm operates in the financial sector where ROIC averages closer to high single digits. Although earnings are expected to decline slightly this year, a pick-up is expected next year. A 13 PE (up from its current PE of 9) applied to next year's anticipated earnings of $1.65 a share would create the potential of a 30% share price increase from today's valuation. Based on its historically high ROIC, the firm deserves a 20% to 25% premium valuation to its long-term earnings growth rate of 10%.

According to the company website, along with SEC filings and recent articles on Forbes.com

The most common driver of dividend growth is expanding earnings per share. As EPS increases, so should dividends. Since January, there have been several companies with upgrades in long-term earnings growth rate estimates, and dividend increases should track these upgrades.

The following companies have experienced increases in 5-year anticipated EPS growth rates and are rated as a "buy": United Technology (UTX), UnitedHealth Group (UNH), Walgreen (WAG), Statoil (STO), and Southern Copper (SCCO). Below are a few valuation comparisons including EPS growth rates, current dividend and yield, historic dividend growth rates, payout ratios and return on invested capital (ROIC):

Energy Transfer Partners (ETP) is a publicly traded partnership that owns and operates a portfolio of assets across the natural gas and natural gas liquids value chain. The partnership's assets include mainly midstream businesses such as natural gas gathering, treating, processing, transportation, and storage. In addition, the firm operates natural gas liquids transportation, storage, and fractionation assets. Energy Transfer also has exposure to crude oil and refined products through its recent acquisition of Sunoco and its ownership of Sunoco Logistics' general partner.

A simpler Energy Transfer Partners will create an improving shareholder environment and will allow for management to better focus on improving earnings and distributions. Last November, management announced plans to restructure its business with the goal of selling some assets, and the company is executing on this plan.

Last December, Energy Transfer announced the sale of Southern Union Company's Missouri Gas Energy and New England Gas Company to

Many investors have exposure to Europe though ETFs, either as a basket crossing country borders or country specific. The most popular ETFs are listed below:

• MSCI European ETF (VGK)
• iShares S&P Europe 350 Index Fund (IEV)
• SPDR DJ Euro STOXX 50 ETF (FEZ)

Top 3 Regional European ETFs:

• iShares MSCI UK Index Fund (EWU)
• iShares MSCI EMU Index Fund (EZU)
• SPDR DJ STOXX 50 ETF (FEU)

Top 3 Country-Specific European ETFs:

• iShares MSCI Germany Index Fund (EWG)
• iShares MSCI Switzerland Index Fund (EWL)
• iShares MSCI France Index Fund (EWQ)

It may be time for those who have no or little exposure to consider taking a position in the European markets. However, it should be done with a longer term vantage point in mind. While Europe has more than its share of problems

Mercer International (MERC) is the second largest global manufacturer of Northern Bleached Softwood Kraft pulp and is relatively unknown to most investors. As a highly cyclical company, the timing of purchases at the bottom of the corresponding commodity cycle is critical for long-term capital gains. Also known as NBSK, below is a 5-year monthly graph of the underlying commodity pricing.

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Source: indexmundi.com

Compare the above graph with a stock price graph for MERC and the correlation should be obvious.

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If in fact NBSK pricing is turning around from a cyclical low reached in Oct 2012, now could be a good time to buy NBSK producers like Mercer.

There are two types of Kraft pulp used to add strength to paper products such as tissue paper - softwood pulp and hardwood pulp. Softwood pulp is preferred as it adds more strength per ton of usage.

There have been hundreds of articles written about the concept of selling equities in May and going away. Some claim it is a foolproof mechanism to prevent losses while others think it is foolhardy. The overall concept is to bypass the summer slump and to re-establish positions about the first of November.

In reviewing the price-only market performance of utilities stocks from May 1, to November 1, annually over the past 10 years reveals some very interesting trends. The first is that an investor who sold the S&P Utility Index ETF (XLU) on May 1, and bought again on November 1, in each of the past 10 years really would not have been spared much pain and in fact would have missed positive total returns in nine of the past 10 years.

As the table below shows, including the decline of 2008, investors who sold XLU in May and repurchased

Keith Richards, the legendary guitar player of the Rolling Stones and creator of some of the most memorable guitar riffs in the history of rock and roll, announced recently he does not own an iPod. Many utility investors could associate with the "throwback to the good old days of vinyl" that Richards advocates. Regulated electric utility investments can be as stodgy and as seemingly out of touch as vinyl records. However, as an integral part of a diversified portfolio, utilities can and should play a role in most investor's long-term stock holdings.

One of the reasons Keith Richards prefers vinyl is the quality and clarity of its sound, saying that digital listeners are being "shortchanged". Buying into some of the best utility companies would seem as unexciting as the old LPs (referring to Long Playing 33-rpm records compared to the shorter recording lengths offered by the smaller and faster 45-rpm

With the exception of the 1970s bout with stagnant economic growth coupled with rising inflation, also known as "stagflation," the move by the Federal Reserve from being dovish to hawkish on interest rates usually coincided with a turnaround in economic activity. The prevailing view is that the current Fed is on the verge of raising interest rates and the environment will change in comparative yields for utilities.

Over the past several years, income investors have been chasing yield as long-maturing Treasury yields crumbled. Many investors ended up increasing their allocation to utility stocks as a means to replace income lost in rolling over higher duration and higher yielding bonds purchased eons ago. Prior to the current low yield environment, the "safe" play was buying a 5.0% long Treasury, however, recent income investors have to look elsewhere. Not only has the competitive yield environment favored the utility sector, the historic relative

As U.S. equity markets potentially teeter on the edge, some investors are seeking greater international exposure through dividend ETFs. However, investors or their financial advisors need to understand what their ETF holds and the international attributes the fund follows.

There are international dividend ETFs that provide higher yields, but also capture more of the potential downside as shown by a higher beta and higher downside capture ratios. Less risky international dividend ETFs usually provide smaller yields. Some ETFs invest upwards of 36 cents of every $1.00 in U.S. stocks, diluting the overall exposure to foreign-based companies, and others have no U.S. exposure. Since a great many of the 50 or so international dividend ETFs are relatively new, comparing dividend growth may be irrelevant as long-term comparisons would be difficult to ascertain.

Morningstar recapped the international dividend investment thesis quite succinctly in a recent SA article found here:

The rationale

Suez Environmental (SZEVY.PK) is a Paris-based water and wastewater company with a large global reach. Suez is one of the largest players in this highly fragmented industry. Within discussions of the water sector of utility investments, Suez's US-based United Water business unit eventually comes up which drives interest back to its parent. However, as the graphic below indicates, North America revenues, which represents United Water, is a small part of Suez:

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Below is an interesting graphic outlining Suez's international business in both water and wastewater segments:

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Because Suez is headquartered in France, financials are reported in Euros and converted to USD where indicated at a Euro 1.30 = USD $1. Total revenues for 2012 were USD $11.61 billion with about $720 million from United Water. Last year, France represented 36% of revenues and all of Europe totaled 69% of revenues.

Suez needs to be

Consolidated Water Company (CWCO) is a small-cap utility focused on a niche market - potable water from seawater Reverse Osmosis desalinization. As a niche player in a niche market, Consolidated Water may provide interesting diversification within a utility portfolio. Most utility investors seek slow-growth in earnings, slow-growth in dividends and a sense of above average safety offered by being a regulated monopoly. Consolidated Water offers almost none of these attributes. CWCO does offer above average earnings growth potential, successful international focus, and exposure to a growing segment of the water utility sector, along with the opportunity for above industry average dividend growth.

CWCO is headquartered in the Caribbean, supplies water to the islands of the Grand Caymans, the Bahamas, Belize, and the British Virgin Islands. The company is working on projects in Mexico, San Diego, and Bali, Indonesia. The company operates 14 desalination plants with total capacity of 26.8 million

I recently ran a stock screener on finviz.com with only four criteria, and the search results per screen were:

Utilities = 123 stocks

Utilities + dividend yield over 4.0% = 38 stocks

Utilities + dividend yield over 4.0% + Return on Equity over 5.0% = 27 stocks

Utilities + dividend yield over 4.0% + ROE over 5.0% + debt to equity under 0.80 = 3 stocks

The screening criteria should be self-evident - the goal is to find utility companies with above average current yield and above average return on invested capital. In addition, the screen will include companies with less than average debt loads. Managers of these companies should be providing investors with higher than average current income, conservatively managed balance sheets, and high returns on total corporate capital deployed. Some believe long-term earnings potential cannot exceed a firm's ability to generate a consistent return based on all the

BGC Partners (BGCP) stock rose 48% on April 2, and it was not a late April Fool's joke. Although share prices are still down 24% from its 52-week high and have been underwater by as much as 58% in 2012, BGCP may still have room to move higher, albeit at a slower pace than Tuesday. Management announced after the market closed on April 1 the sale of a portion of its business, and the proceeds will remake the company.

BGC Partners is named after B. Gerald Cantor who founded Cantor Fitzgerald in 1945. BGC is one of the five largest interdealer brokers in the world and was formed by the merger in 2008 of the BGC Division of Cantor Fitzgerald and eSpeed. Cantor Fitzgerald is one of the largest privately-owned bond dealers and investment banks, and retains a large interest in BGCP . eSpeed offers propriety services and trading technology

Israeli-based Ormat Technologies (ORA) is a premiere geothermal firm operating in the US. As a renewable resource, geothermal power generation has several advantages to its brethren solar and wind. The main advantage is the ability to use geothermal as a base load power-generating source rather than the intermittent characteristics of solar and wind. This difference should make geothermal a preferred renewable source.

While small within the world of power generation, OMA operates 575 MW of total output, spread across several plants in the US and abroad. 406MW of geothermal generation are directly owned by OMA in the US, 53MW are from industrial energy recovery facilities and the balance is international facilities.

Below is a table listing operating capacity by ORA's facilities.

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The concept of geothermal is relatively simple: drill into the earth where the natural heat turns water into steam and utilize the steam to drive

[Editor's Note: This article has been revised since original publication, as the author erred in the analysis about Edison International. Apologies for any confusion this may have caused.]

Is it time to tiptoe back into California utilities? I have been absent any California utility investments since 2001 after selling positions in small-cap California Water Service (CWT) and large-cap Edison International (EIX). California Water provides regulated water services to California, Washington, New Mexico and Hawaii, along with offering non-regulated water services. Edison International is one of the largest regulated electric utility firms, serving over 14 million customers mainly in south and central California. Annual reports for CWT can be found here and investor presentations for EIX are here.

Similar to other regulated utilities, these two companies thrive based on the whims of state regulators. As owners of the company, shareholder interests are therefore closely tied to the

Last December, I wrote an article that explained the concept of duration and what happens to the Net Asset Value NAV of bond funds in times of rising interest rates. Last month, I wrote another article describing a warning FINRA published to all long-term bond investors. As an update, it is important for all bond fund investors to understand and act on their portfolio in an attempt to mitigate the risk to your principal invested in bond funds.

In today's bond market, investors have only one of two choices -- return OF principal or return ON principal. The days of having both are quickly ending.

I had a client come to me with the comment, "My previous advisor lost money for me in bonds. I thought bonds were safe? How could this be?" The answer is actually pretty simple, especially when interest rates are rising.

The four horsemen of regulated southern electric utilities could be Southern Company (SO), Dominion Resources (D), Duke Energy (DUK) and Scana (SCG). Combined, these firms cover the majority of the southeastern US from Mississippi to Virginia. In addition, each has ancillary assets such as natural gas distribution, electric transmission and merchant power.

Below are maps outlining their respective service areas and asset locations, where available from their websites:

Southern Co - Market Capitalization $39.6 billion

Dominion Resources - Market Capitalization $32.7 billion

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Duke Energy - Market Capitalization $49.5 billion

Scana - Market Capitalization $6.55 billion

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Below is a table outlining various fundamental values for each:

Much like the Red Rocket vs. the Blue Bomber of the Rock'em Sock'em Fighting Robots fame, the circa 1964 kids game, most utility investors may be unaware of the fight going on between nuclear power and wind power.

Similar to the situation in Europe, there are now circumstances whereby power generators are realizing a negative price for their electricity. In researching a SA article about the impact of intermittent power generation on overall electricity pricing, this quote caught my eye from an executive at Exelon, the largest nuclear power generation company in the US:

"It is becoming more pronounced as more wind is coming on," Christopher Crane, chief executive officer of Chicago-based Exelon Corp., said in a phone interview. If the push to "over-develop" subsidized wind continues, "there is a very high probability that existing safe, reliable nuclear plants will no longer be competitive and will have to