Huaneng Power: A Chinese Utility to Consider

| About: Huaneng Power (HNP)

Typically, utilities fall into the category of "widow and orphan" stocks. Safe, steady, and usually paying a respectable, if not spectacular, dividend would be the typical characterization of most utility stocks.

Utility stocks can also function as a proxy for a nation's economic growth. As an economy grows, the resulting production and activity causes an increase in energy demand. Somewhat obviously, if the investor is attempting to use an investment in utlities in this fashion it makes sense to invest in the largest of a country's utilites.

This brings me to Huaneng Power International, Inc. (NYSE:HNP), which is China's largest independent producer of energy and largest listed producer of electricity. HNP has a generation capacity in excess of 46.5 gigawatts generated by investments in plants in 17 provinces, municipalities and regions. (The shares trade as ADRs). Its power plants are concentrated in the eastern and central regions of China.

Despite signs of overheating in the Chinese economy, causing the government to apply the brakes in an effort to generate a "soft landing", China is growing at the rate of 9.70% (as Q1, 2011). Consequently, its logical to think that China's demand for energy will continue to grow, albeit at a more modest rate, as the governemnt's efforts to dampen inflation begin to bite. According to the Trading Economics website China's GDP is projected to grow at 6.1% for the year.

There are some flies in the ointment regarding HNP. 90% of its power generation comes from coal-fired power plants and the rise in coal prices, along with other commodities, has put a crimp in the company's margins. Chinese regulators have been notably stingy in allowing Chinese power companies to pass through these increased costs through rate hikes as the government seeks to dampen inflation for consumers. Given that the Chinese government owns 51% of the company it should come as no big surprise that political "considerations" may well outweigh shareholder interests.

Despite its current reliance on coal, HNP is also involving itself in "green" energy production via its Huade Wind Power plant, a 49.5 MW facility in Inner Mongolia.

The other fly in the ointment concerns dividends. As noted at the beginning of the article, utilities typically pay at least reasonable dividends and HNP had been no exception, typically making a single annual payment, payable in June, or early July (there's been some small variance during the years of 2006 through 2010). Many foreign firms pay dividends either on a semi-annual, or an annual basis. What may be more unsettling, from a dividend investor's perspective, is that the amount has varied fairly widely; 1.245 in 2006, 1.4488 in 2007, 1.6805 in 2008, .5655 in 2009, and 1.0874 in 2010. The yield has varied from 2.52% up to 5.76%. I've not been able to find any announcements for the current year.

I would consider HNP a "businessman's risk" stock that's worth watching as more of cap gain play, rather than a more traditional dividend play, with an entry below $21 (it closed on 6-8-11 @ $22.47) and a target of $24.00 within 12 months.

Sources: Trading Economics Analytics
Huaeng Power International website

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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