Alan Brochstein checks out utility stocks for income-seekers
It has been several months since I examined utility stocks for potential bargains. Most recently, I looked for high-yielding utilities with low debt and low pay-out ratios, highlighting
11 utilities yielding more than 4.5% in March
. Most of them have performed well, including
, which I had called out as the most interesting of the eleven and subsequently entered into an agreement to be acquired.
In light of the recent sharp decline in the market as well as the drop in interest rates and the yields on bonds, which compete for investor dollars, I wanted to take another look at the sector.Utilities seem to be a safer bet than stocks in general in a potentially weak economy. Today, I am tilting the focus towards not only high yield and increased safety but also the potential for dividend growth. Here are the screening parameters:
• Yield > 4.0%
• Net Debt to Capital < 65%
Continue Reading Below
• Payout Ratio < 75%
• Dividend Increases: At least 3 in the past 5 years
• 5-year Dividend Growth Rate >5%
• Market Cap > $1 billion
The goal is to find higher-yielding companies without excessive leverage and reasonable payout ratios that have been increasing their dividends in recent years. Here are the 8 that made the cut:
[click on the chart above to enlarge it]
As always, remember that these are not recommendations. Further, while the companies have been raising their dividends, there is no guarantee that they will continue to do so. By focusing on payout ratio and the amount of debt, we are hopefully eliminating any companies that might be constrained from continuing to raise dividends.
Looking at the list, the yields run from 4% to as high as 5.3%. Half the companies have raised their dividend in each of the past 5 years. I have also included a column for P/E (based on 2012 estimates) as well as a column that compares the current P/E to the average of the past 5 years. With the exception of
, which also has the highest payout ratio and highest net debt to capital, all of the stocks are trading below their average P/E.
I have kept
on the list because the payout ratio appears to low enough that the dividend is likely to be maintained, but I want to point out that earnings in 2012 are supposed to decline significantly (29% from 2011 according to analyst estimates) as hedges roll off. I would also note that
, which has recently transformed itself with a large acquisition in the UK, is expected to see earnings decline slightly in 2012. The other six names are expected to grow earnings in 2012, with Westar (WR) currently expected to grow 16% after declining slightly this year.
When evaluating Utilities, there are many factors to consider beyond those that I have used to create this list, including the strength of the local economies in which they conduct business, the company's relationship with regulatory authorities, the amount of non-regulated business and the mix of fuel types.
I continue to believe that investors should be considering alternatives to bonds. Along with Real Estate Investment Trusts and high-quality dividend-paying companies, utility stocks offer reasonably high yield with the potential for growth. While the growth potential might be less than the other areas I mentioned, utilities should fare better if the economy weakens further or goes into recession again. They should also perform better than long-term bonds should the economy strengthen and interest rates rise. The screen I shared is designed to identify higher yielding utilities with signs of sustainable dividends. I encourage you to explore this sector and look forward to hearing your observations.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: Alan Brochstein does not currently hold any positions in the securities mentioned above.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.
TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders and who provide timely market commentary via the TradeKing All-Star blog at
. Each All-Star commentator’s bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at
. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Alan Brochstein, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.