Oddly, this isn't the first time this thought has popped in to my mind. Last year I wrote a piece titled "3 Reasons I Would Sell a Stock." The listing was created to help me identify holdings that have fallen out of favor in my portfolio or have not performed. After elaborating on the 3 reasons I would sell, I reviewed my portfolio for any stocks that met the criteria. Any takers on guessing which one of the stocks that was discussed in the article? First Energy! Shocker, right? After one heck of a run by the stock that has brought me close to break even, I now find myself asking the question again. Is it finally time to sell my stake in First Energy?
First Energy (NYSE:FE) has been a problem child for me from the beginning. Unfortunately, it sometimes works out like that. Historically, FE has been a stock that pays a high stagnant dividend yield. It is an electric utility after all. Despite the fact that the company's recent dividend growth rate was non-existent, I was willing to overlook this fact due to the high yield (Which was above 5% at the if I recall). First big mistake right there; I was caught chasing yield and boy did I learn the hard way. Months after I purchased the stock, FE slashed their quarterly dividend from $.55/share to $.36/share. Ugh! That decrease caused a massive sell-off and my position turned red really fast. Isn't the phrase dividend cut becoming too common on this website? Especially after what happened with KMI and then BBL over the last few months? Finally, after over two long, painful years, my position is at the breakeven point due to dividend re-investment and I have the opportunity to potentially re-coup my initial investment.
To determine if I should sell the stock, I want to be able to answer one simple question. If I did not own a stake in the company and had extra capital lying around, would I purchase stock and initiate a position in First Energy? If FE does not pass our stock screener and I would not purchase shares, then why on earth am I holding on to them? Especially considering the fact that I own a small stake in another electric utility that happens to be one of our 5 foundation dividend stocks. Outside of the fact that I am being really stubborn here and don't want to realize a loss. To answer this question, I decided to run FE through the Dividend Diplomats Dividend Stock Screener to see if FE would pass this daunting test. Let's see how FE performed.
- Price to Earnings Ratio Below the S&P 500 - Using FE's forward EPS per TheStreet.com of $2.84, FE is currently trading at a forward PE multiple of 12.6X, which is well below the PE ratio of the S&P 500. For comparison sake, ED is trading at a multiple of 18.71X. So FE is trading at both a discount to the market and one of the major players in the industry.
- Payout Ratio below 60% - Using the forward EPS from the line above, FE's payout ratio is 50% while ED has a payout ratio of 66%. Again, FE passes our metric and shows a better figure than ED.
- Paying an Increasing Dividend - As I already mentioned earlier, FE cut their dividend to $.36/share per quarter in 2013 and has not increased their dividend since. So this point represents a big negative as my stagnant dividend stream is losing purchasing power each year. For comparison sake, ED is a Dividend Aristocrat and has a 5 year average dividend growth rate of 1.9%. This really isn't much better; however, at least their dividend is growing at a rate near inflation.
- Dividend Yield - This isn't one of the metrics on our stock screener, but it is worth pointing out. FE's current dividend yield is about 4% while ED has a current yield of about 3.56%.
- Debt to Equity Ratio - Again, this metric is not a part of our initial stock screener. I began focusing on the impact of debt on a company when my KMI dividend was slashed significantly. However, I really should have begun looking at a company's debt burden when I purchased stock in First Energy. Per finviz.com, FE has a Debt to Equity Ratio of 1.78X and ED has a Debt to Equity ratio of 1.09X. I understand that debt is not always a necessarily a bad thing, but I am a little "debt averse" after my recent experiences. So much so that I even created a Top 5 list to identify Dividend Aristocrats with low debt to equity ratios. We all have flavors of the month and mine is currently LOW DEBT!
Now that I have run some numbers, let's get back to my original question. Would I purchase shares in First Energy today based on the information above. The answer is…..no. So why am I not logging into Capital One Investing now and selling my stock? Where is my hesitation and why am I struggling to make a decision here? What has me torn is that while the stock may not have passed all metrics in our screener, it didn't fail all of the screeners. In fact, when compared to another company in its industry, the company appears to be trading at a significant discount while sporting a higher dividend yield. The fact the company is trading at a discount makes perfect sense to me when you consider some of the negative factors I mentioned above. Is the dividend growth rate terrible? Yes. Do they have a lot of debt? Yes. However, their payout ratio is well below our 60% threshold. So the answer isn't as clear as I was hoping it would be by the time I reached the end of this article.
So all of you, I am asking you for your help here. You offered Lanny some great advice about his internet package this week and I have loved reading your responses as they have come in. So I would love to get your take on my dilemma. If you were me, would you sell your stake in First Energy? If so, what other companies would you recommend? I am thinking I would go the ultra safe route and purchase a foundation stock or one of the stocks on my "Always Buy" list with the proceeds. Are there other utilities I should consider as well? Please everyone, help me out here!