Of 97 Utilities, 27 'Safer' Dividend Payers Were Chasing Pattern Energy's Performance In February

Summary

• Top "safer" dividend utility by net gain, PEGI, showed 40% net as of 2/27/18 per broker targets, while nine trailing averaged 13.32%.
• 27 of 97 Utilities stocks were deemed "safer" for dividends because they showed positive one-year returns and free cash flow yields greater than dividend yields.
• Top 10 "safer" Utilities annual dividend yields ranged from 5.28% to 9.22%. Their free cash flow yields ranged from 7.19% to 22.86%.
• Total annual returns narrowed the "safer" utility list of 97 to 89 by excluding firms reporting negative annual returns.
• Analyst one-year targets revealed the ten highest yield "safer" utilities were primed to get 24.47% more gains from $5K invested in the lowest-priced five vs. $5K invested in all ten.

Actionable Conclusions (1-10): Analysts Predict Top Ten Utilities 'Safer' Dividend Stocks Netting 3.9% to 40% Gains To February 2019

Seven of ten top dividend Utilities (whose names are shaded in the chart above) were verified as being among the Top ten gainers for the coming year based on analyst 1 year target prices. Thus the yield metrics for this Utilities group, as graded by analyst estimates for January, proved 70% accurate.

Projections based on estimated dividend returns from $1000 invested in the twenty-seven highest yielding 'safer' stocks and their aggregate one year analyst median target prices, as reported by YCharts, created the 2019 data points. Note: one year target prices from one analyst were not applied (n/a). Ten probable profit-generating trades to February, 2019 were:

Pattern Energy Group (PEGI) netted $401.00 based on estimates from fifteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 8% under the market as a whole.

NRG Yield (NYLD) netted $257.44 based on dividends plus a median target price estimate from five analysts less broker fees. The Beta number showed this estimate subject to volatility 82% more than the market as a whole.

NRG Yield (NYLD.A) netted $218.92 based on dividends plus a median target price estimate from seven analysts less broker fees. A Beta number was not available for NYLD.A.

TerraForm Power (TERP) netted $218.92 based on a median target price estimate from seven analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 2% less than the market as a whole.

Brookfield Infrastructure (BIP) netted $181.78 based on a median target price estimate from ten analysts, plus projected annual dividends, less broker fees. The Beta number showed this estimate subject to volatility 4% less than the market as a whole.

8point3 Energy Partners (CAFD) netted $142.21, based on target price estimates from nine analysts, plus estimated dividends minus broker fees. No Beta number was available for CAFD.

FirstEnergy (FE) netted $141.15 based on dividends plus a median target price estimate from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 68% less than the market as a whole.

Great Plains Energy (GPP) netted $91.49 based on a median target price estimate from eleven analysts, plus estimated dividends less broker fees. The Beta number showed this estimate subject to volatility 58% less than the market as a whole.

Engie SA (OTCPK:ENGQF) netted $41.29, based on dividend alone, with no target price estimate from any analysts, less broker fees. The Beta number showed this estimate subject to volatility 25% less than the market as a whole.

Atlantica Yield (AY) netted $39.09 based on mean target price estimates from six analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 4% more than the market as a whole.

Average net gain in dividend and price was 17.33% on $10k invested as $1k in each of these ten Utilities "safer" dividend stocks. This gain estimate was subject to average volatility 9% less than the market as a whole.

Actionable Conclusion (11): (Bear Alert) Analysts Predicted One 'Safer' Dividend Utilities Stock To Lose 7.69% By February 2019

The probable losing trade revealed by YCharts for 2019 was:

Enel Generacion Chile (EOCC) projected a $76.87 loss based on dividend plus a median target price estimate from four analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 29% less than the market as a whole.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called, "underdogs".

Five Utilties Industries Show "Safer" Dividends

Five industries constitute the Utilities sector, and all five were represented by the 27 firms whose stocks showed positive annual returns with margins of cash to cover dividends by this screen as of February 28.

The industry representation broke-out, thus: Independent Power Producers (5); Regulated Electric Utilities (9); Diversified Utilities (7); Regulated Gas Utilities (4); Regulated Water Utilities (2).

The first four industries listed above populated the top ten Utilities 'safer' dividend team by yield.

27 of 97 Utilities Firms Show "Safer" Dividends

Periodic Safety Inspection

A previous article discussed the attributes of the 50 Top yield Utilities stocks culled from this master list of 97.

You see grouped below the tinted list documenting 27 that passed the Utilities dog "safer" check with positive past-year returns and cash flow yield sufficient to cover their anticipated annual dividend yield. The margin of cash excess is shown in the bold face "Safety Margin"column.

Financial fortunes, however, are easily revised by boards of directors setting company policies cancelling or varying the payout of dividends to shareholders. This article contends that adequate cash flow is a strong justification for a company to sustain annual dividend increases to shareholders.

Four additional columns of financial data, listed after the Safety Margin figures above, reveal payout ratios (lower is better), total annual returns, dividend growth levels, and p/e ratios, for each stock. This data is provided to reach beyond yield to select reliable payout stocks.

Total annual returns by positive results narrowed the 97 Utilities dogs list to 89 for this article. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.

To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates became another tool to dig out bargains.

Yield Metrics Revealed Healthy Bargains From Lowest Priced Top Ten Yielding "Safe" Dividend Utilities Sector Stocks

Ten "Safe" Dividend Utilities firms with the biggest yields February 28 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: Analysts Predicted 5 Lowest Priced, of Ten "Safer" Dividend High Yield Utilities Sector Dogs, (11) To Deliver 18.14% VS. (12) 14.58% Net Gains from All Ten by February 2018

$5000 invested as $1k in each of the five lowest priced stocks in the ten "safer" dividend Utilities Sector pack by yield were determined by analyst 1 year targets to deliver 24.47% more gain than $5,000 invested as $.5k in all ten. The ninth lowest priced "safer" dividend Utilities stock, Pattern Energy Group (PEGI) showed the best analyst estimated net gain of 40.1% per their targets.

Lowest priced five "safer" Utilities dogs as of February 28 were:

Iberdrola (OTCPK:IBDSF); TerraForm Power (TERP); 8point3 Energy Partners (CAFD); NRG Yield (NYLD.A); NRG Yield (NYLD), with prices ranging from $7.34 to $15.65.

Higher priced five "Safer" Dividend Utilities dogs as of January 26 were: Engie (OTCPK:ENGIY); Engie (OTCPK:ENGQF); Valener (OTCPK:VNRCF); Pattern Energy Group (PEGI); Atlantica Yield (AY), with prices ranging from $15.69 to $19.63. The low priced little Utility dogs came back in a big way.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article, this glossary instablog to interpret my abbreviated headings, and this instablog to aid your safe investing. -- Fredrik Arnold

Stocks listed above were suggested only as possible starting points for your safest "Safer" Utilities dog dividend stock research process. These were not recommendations.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from YCharts, Yahoo Finance; analyst mean target price by Thomson/First Call from Yahoo Finance. Dog photo taken from topdogtips.com.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long CAFD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[408frank]

I agree that Payout Ratios are very important along with free cash flow. I was unable to find the payout ratio on any of your spreadsheets! Did I miss something?
Thanks for sharing your insights with Utilities.

[Fredrik Arnold]

On the tinted charts illustrating the article above, the column to the right of the Safety Margin column lists the Cash Dividend Payout Ratio (annual) expressed as a percentage for each entry.

[User 41156665]

CAFD is a company that I have myself and feel that although it has risks involved it is a viable Enterprise worth a Speculative sized position (small). A company such as GPP on the other hand is a pure Yieldco and isn't viable as a standalone and has a weak parent. That type of investment, (GPP) is much like investing in the water connections and recycling systems of 1 particular car wash! Just how does one value something like, as an asset or Enterprise Value? If you go by GPP's yield history its GREAT. However, a closer look at its assets are sobering and offer little in the way of standalone investor value. After all, the original "Ponzi" from the "Ponzi scheme" paid dividends above the market but it wasn't based on a business model that could generate Earnings or returns for its investors.

[User 41156665]

The Name of the game in long-term investing is "Total Shareholder Returns". With utilities current yields can be misleading because they are frequently attached to "Falling Knife" investments whose yield is high due to its recent share price collapse which oftenh signals an imminent 'Dividend Cut' or at best an uncertain future. In these cases, size and business models matter which explains why a 'PPL' or 'Southern Company' with their mostly regulated and diversified long term presence is indicative of a possible bargain, though NOT without risks. Those risks may come in the form of the "dilution" through large equity offerings, but the combined discount and overall soundness of those high yielding Large-Cap Utilities (~5.5% yield) usually means a lower than average CAGR, going forward, and a lower rate of dividend and share price increases are likely versus a Dominion, AEP, Next Era Energy, or Con Edison. Initially, Southern and PPL will pay higher yields, but their comparative "Yield-On-Cost" would tell a different story. The same is true of the low yielding Water Utilities such as, American States Water, AWR, Aqua America, WTR, and American Water Works, AWK. Owning all of the above, its become obvious that the Water Utilities have low current yields due to rapidly increasing share prices and, surprisingly, a Higher "Avg. Yield-on-Cost" and "Total Shareholder Returns" that most of the much higher yielding electric and multiline utilities with one exception: Next Era Energy. Oddly, Next Era Energy pays among the very lowest present dividend yields despite increasing at over ~10% annually and 13+ % over the past 3 years. That however is due to the high CAGR in its share price, that's doubled over the past 5 years while Southern and PPL's share prices have actually declined over the period.

As someone whose household income is largely derived from dividends from a long term trust, that I administrate, I am painfully aware of these realities and have, on occasion, paid very high prices for very impressive dividends/distributions.

[User 47998195]

lwp,

Is it a bad idea to add PPL or Southern Company at current share prices with such attractive yields?

[User 41156665]

dr.p,

For you, yes, but they'll likely continue paying high yields-on-cost for current buyers as their share prices decline. PPL is sounder than Southern, especially at current share prices and pays a higher yield [Almost 6%], but Mr. Market has a myriad of fears regarding the impact of "Brexit", "Potential Nationalization", "GBP weakness", and continued interest rate hikes. Add to that, the $1 Billion in additional equities the company plans on issuing to avoid having credit rating issues due to its high leveraging.

Southern Company, which we own about 11x as much of in net asset value [as of today] versus PPL has many sound segments in its overall Holding Company. However, the lack of Net Earnings and the tarnished future promise caused by the expensive failure of Coal Gasification, at Kemper as well as the cost overruns at its Vogtle Nuclear plant has caused issues that will impend the "Total Shareowner Returns" for years to come. In the meantime, companies, such as "Dominion Energy" and "Next Era Energy" have a lot of upside potential, a lot of dividend growth going forward, and are better positioned for the future Energy environment. Dominion is selling for a huge discount, exaggerated since the "Scana" acquisition announcement but Next Era is the dominant Energy player in the Utility sector with Renewables in the largest measure in the U.S., both through Regulated Operations, FPL, and Unregulated, throughout the country.

At ~$72 Dominion is really priced to low to pass, as it is worth about 1/2 of NEE, which is currently trading around $155 when I checked last. Both are long term buy and hold "SWAN" candidates.