Just The Numbers: 6 Electric And Gas Utilities

Summary

• Electric and gas utilities are generally “sleep-at-night” investments offering dividend yield and stable growth.
• Utilities are expected to provide their customers completely reliable service at low cost; they thus must balance a range of capital-intensive fuel sources and infrastructure to meet these goals.
• With their debt-heavy structures, these companies are subject to increasing interest rate costs.

Several mid-range utilities give investors good choices about dividend yield or dividend yield plus earning-per-share growth among a group of companies whose stock prices are considerably less volatile than the overall market.

General Background and Specific Companies

From an investor’s standpoint, this group of six companies is mid-range, with interesting dividend yields and average analyst ratings that are between “buy” and “hold” though generally closer to “buy.” They include AES Corporation (AES), CMS Energy (CMS), Dominion Energy (D), DTE Energy (DTE), Edison International (EIX), and South Jersey Industries (SJI). Most are electric or electric and natural gas retail utilities; SJI is natural gas only. This report uses stock symbols for reference since many of the company names include these symbols.

Market Capitalization, Stock Price, and Current vs. 1-Year Target

Based on April 9, 2018 closing prices, D has the largest market capitalization at $43.3 billion. CMS, DTE, and EIX are clustered at $12.7 billion to $20.7 billion. SJI is the smallest, an outlier with a $2.4 billion market capitalization. Recall that SJI is a natural gas-only utility.

Reflective of low volatility (discussed below), good prospects, and perhaps concern about debt levels, all of these companies are reasonably close (88-95%) to their one-year target prices.

	4/9	1-yr	Current
Symbol	Price	Target	v 1yr tgt
AES AES Corp	11.39	12.71	90%
CMS CMS Energy	45.10	48.07	94%
D Dominion Energy	66.37	75.57	88%
DTE DTE Energy	104.34	110.25	95%
EIX Edison Int'l	63.46	68.30	93%
SJI South Jersey Ind	29.99	31.67	95%

Click to enlarge

Current Ratio, Dividend Yield, and Price-to-Earnings Ratios

The current ratio measures liquidity: it's the ratio of a company’s current assets to its current liabilities. A current ratio does not include credit facilities or borrowing bases, so the ratio is of interest but not definitive. A ratio of 1.0 is a minimum desired level; of course, companies are also careful not to tie up funds in non-productive assets. As well, utilities typically have good access to debt markets and thus liquidity. The current ratios for these companies range from 0.5 on the low end for D, EIX, and SJI to 0.9-1.1 for AES, CMS, and DTE.

CMS offers a 3.2% dividend yield, DTE pays 3.4%, SJI offers 3.7%, and EIX yields 3.8%. AES offers a 4.6% dividend yield, and D offers a substantial 5.0% yield.

On the trailing twelve months’ price-to-earnings (P/E) measure, both AES and SJI have non-applicable ratios since their most recent earnings per share were negative. Among the others, D and DTE have P/E ratios of 14 and 17, respectively, while CMS’ P/E stands at 28 and EIX has the highest P/E ratio, 37.

Investors may want to note that the forward P/E ratios for CMS and EIX suggest impressive growth in next year’s earnings per share of 52% for CMS and a hot 163% for EIX.

The graph above shows the average decline in US natural gas prices in the last ten years, a benefit for these utilities that sell natural gas directly and for these using natural gas to generate electricity.

Some Company-Specific Risks and Benefits

Without doing a comprehensive comparison, each of these companies has some interesting operational risks and benefits:

• AES, The AES Corporation, which is headquartered in Arlington, Virginia but operates on four continents, was selected yesterday by Zack's as one of five good defensive utility stock holdings partly on the basis of an expected earnings growth rate this year of 10.65%; as recently as February, after its 2017 loss per share of -$1.76 Zack's had rated the company as a strong sell.
• CMS, CMS Energy, is an old-line Michigan company whose subsidiary, Consumers Power, is the largest utility in Michigan and the fourth largest in the US. After bringing on two nuclear plants, the company nearly bankrupted itself in the 1980s trying to building a bring on a third, in Midland, Michigan. Eventually, it was able to convert the non-nuclear part of the plant to a cogeneration facility serving Dow. More recently, it has benefited from nearby natural gas resources. Via a non-regulated subsidiary CMS generates independent power in several states. Moreover, RBN Energy suggests that excess natural gas from the Permian will increasingly be directed to the north and Midwest US.
• D, Dominion Energy, ranked #222 on the Drucker Institute of best-managed companies yet ironically scores the worst of the six (see below) on a governance ranking. In Virginia, there has been concern that the state government has been insufficiently stringent, an approach it changed with a new regulatory bill in February. Its liquefied natural gas export terminal just started commercial service today, April 10th.
• DTE's, DTE Energy's customers are also benefitting from lower natural gas prices in the company's Detroit and suburban southeast Michigan service area resulting from proximity to Ohio and Pennsylvania natural gas reserves, as well as gas being forced northward from west Texas. Like many other utilities, DTE is increasing its renewable energy generation capacity.
• EIX, Edison International, may notably have some liability for last year's extensive California fires. Additionally, the CEO notes that the California state-US federal disagreements on many areas, including environmental regulations, will affect its business.
• SJI, South Jersey Industries, a gas utility, benefits from its proximity to abundant, low-cost natural gas in the Marcellus and Utica shale plays, as described in my recent article on another New Jersey utility, Public Service Enterprise Group. In the last week, Zack's noted that analysts have become more bullish on the sector and on this particular company.

Liability-to-Asset and Short Ratios

A company’s overall liability-to-asset ratio indicates its level of financial flexibility. In line with their low volatility, these companies all have high liability-to-asset ratios, ranging from 69% for SJI to 83% for AES. When interest rates rise, the companies could be exposed to the risk of higher debt costs.

Again indicative of stability, none of these stocks has a high ratio of shares held in short positions to floated shares. All are 1-3%.

Betas

Beta provides a useful metric for these companies: a stock’s beta is a measure of its volatility relative to the overall market, where a beta of 1.0 represents a stock that moves fairly exactly with the market. A beta larger than 1.0 means higher volatility, less than 1.0 means lower volatility, and negative means counter to the overall market. Only AES has a beta greater than 1: it is 1.29. The betas for CMS, D, DTE, and SJI range from extremely low to low, 0.07 to 0.35. Of particular interest, the beta for EIX is actually slightly negative or counter-market, at -0.03.

Governance

The Institutional Shareholder Services gives companies overall governance scores and sub-scores, or “pillar scores” in audit, shareholder rights, board, and compensation on a scale of 1-10, with 1 being the best. AES and EIX have overall scores of 1, DTE and SJI have scores of 2, CMS has a score of 3, and D has a score of 8. D’s lowest sub-score is a 9 for its board.

Recommendations

For investors considering strictly dividend yield, all of the companies offer good dividend yields of 3.2%-5.0%, with AES and D offering the highest dividends of 4.6% and 5.0% respectively. DTE and SJI also offer good dividend yields.

Investors also considering EPS growth will want to look at CMS and EIX. The somewhat-high trailing P/E ratios of both indicate already-solid market interest; however, the potential EPS growth suggested by their forward P/E ratios suggests strong upside.

Before deciding, investors should consider all factors in a company’s current operations, as well as its current and future earnings, strategies, and issues.

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