Wednesday, May 11, 2011

5 Utility Stocks I'm Considering

For those of you who read my Dividend Portfolio Analysis, one of the things you may have noticed is that I currently only own one Utility company: Southern Company (ticker: SO).  Southern Company has been raising dividends for 10 years now, has been an excellent part of my portfolio, and I am very optimistic about its future. 

Furthermore, SO was one of the few companies I call "The Original Six." To provide a brief background to my dividend investing days before DividendPartisan, the very first purchase for my Income Portfolio was near the beginning of 2010 of six individual stocks, SO being one of them.  The other originals were: ABT, JNJ, PAYX, PEP, and WM.  This initial 'mix of six' provided me a relatively diverse foundation to begin with: 2 stocks in Healthcare, 2 in Industrials, 1 in Consumer Defensive, and 1 in Utilities;  all six part of my strategy of choosing solid dividend payers.

Since then I have added seven more companies (ADP, ANH, CINF, GE, LEG, PG, and WMT)  making it a current total of 13 in my income portfolio.  

I am now looking to possibly add another utility by the end of the year, which would help further my diversification and would also provide another attractive yield.

The following are 5 Utility Stocks I am considering for purchase at some point in the future:

Duke Energy Corporation (DUK): Yield - 5.25%


Duke Energy is one of the largest multistate holding companies of regulated electric and gas utilities, with regulated utilities in the Carolinas, Indiana, Ohio, and Kentucky that deliver electricity to about 4 million customers and deliver natural gas to 500,000 customers. Duke's competitive generation and power retailing business operates primarily in the Midwest, and its international energy segment owns and operates hydroelectric generation assets in Latin America (from Morningstar)

Consolidated Edison Inc. (ED): Yield - 4.55%

Consolidated Edison is a holding company for two regulated utilities: Con Ed of New York, and Orange & Rockland. These utilities provide steam, natural gas, and electricity to customers in southeastern New York--including New York City--and parts of New Jersey and Pennsylvania. The company's electric utility operations generate more than three fourths of Con Ed's operating revenue. The remainder comes from an energy marketing business and infrastructure investments (from Morningstar)

American Electric Power Co Inc. (AEP): Yield - 5.02%

American Electric Power is one of the largest regulated utilities in the U.S. AEP's electric utility operating companies provide generation, transmission, and distribution services to more than 5 million retail customers in 11 states.  About 80% of AEP's power is generated using coal. Approximately 55% of AEP's revenue comes from operations in Ohio, Texas, and Virginia (from Morningstar)

Brookfield Infrastructure Partners LP (BIP): Yield - 5.40%

Brookfield Infrastructure owns and operates electricity transmission systems and timberlands in North and South America. Brookfield focuses on acquiring infrastructure assets that have low maintenance capital costs and high barriers to entry. The company was established by Brookfield Asset Management, which still acts as the manager of Brookfield Infrastructure (from Morningstar)

Progress Energy Inc. (PGN): Yield - 5.25%

Progress Energy is a holding company providing electricity generation, transmission, and distribution through its regulated electric utility operating companies in North Carolina, South Carolina, and Florida. Its operating companies are Carolina Power & Light, which serves 1.5 million customers, and Florida Power, which serves 1.6 million customers (from Morningstar)

My Thoughts:

Yield - BIP wins this category.  However, as you can see from the list above, all of the utilities average right about 5% yield, with some being a bit higher than others because of current stock prices.  As far as current yield goes, the playing field is generally pretty even. 

Dividend Stregth - Consolidated Edison wins this category hands down. It has had higher dividends for 37 straight years.  No other company comes close (DUK was 2nd with 6 years of higher dividends).

Current Stock price - AEP wins this category.  It has the lowest P/E ratio of the group (11.4) and even despite its recent jump in price over the past two weeks, analysts think it still has room to grow.

Finally, one major note when considering purchasing any of these companies that I should mention now - PGN and DUK may be merging, which would make DUK the largest utility out there.  Clearly, that would change the list and be a large factor in my decision..but for now, using the list of five above will suffice until something is finalized.

Conclusion - If I had to pick today, I would choose AEP.   DUK would take a close second (with merger details pending), but I like AEP's price and though it failed to raise it's dividend in 2009, I still believe it as a 'dividend growing company'.

In summary, listed above are some initial thoughts to generate discussion and get you thinking about utilities.  Start your due diligence now.  I'm always up for some deeper, lengthier discussion either in the comment section or directly through email.  What has your research shown you?  The five companies above are quality, dividend paying Utilities that could make a nice addition to an income portfolio if the timing and price are right.

I'd be interested to hear what you think is the best dividend utility stock.  Do you agree AEP is currently the best option? Is it one of the other companies above, or is it one that wasn't mentioned?

Thanks for reading,

DivPartisan

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9 comments:

  1. Just wondering, why not EXC?

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  2. I like utilities. A bit of a certainty in terms of business (at least in Canada). I own most of them through Computershare and CIBC Mellon.

    I have Just Energy with an 8% yield but the others are around 3%-4%. ENB is a really big one for us (it trades on NYSE). In reading the number of customers, they appear to be small utilities, is there a lot of competition?

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  3. I just had a look at the market cap of the stock mentioned. They are actually big compared to Canadian utilities. I just thought they might be bigger considering the population difference :) In Canada, you tend to have one major utility per province servicing gas and/or electricity with the exception of Quebec and Canada which is big enough to have more competition.

    Still curious about competition across states. Are there monopolies? In BC, Fortis pretty much owns natural gas.

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  4. Anonymous,

    Exelon is a great option too. M* rates it five stars currently, which cleary indicates they think it is trading well below its fair value. It too yields right at 5% and seems to have good financials. My only concern would be that it hasn't raised its dividend in 10 consecutive quaters. Otherwise, from first analysis it looks great and definitely agree that it should be considered. What are your thoughts?

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  5. Passive Income Earner,

    Thanks for the note. Those are some great holdings you have. As for utilities in the US, (and someone smarter please comment as well and help me out), it seems as if each company covers a few states. My stock, Southern Company (SO) has the Southeast (Alabama, Georgia, etc); Duke has the Carolinas, Indiana, Kentucky, Ohio; AEP has 11 states with its focus on Ohio, Texas and Virginia. And so on...

    So, it seems there are several large utilities available per region, but if DUK and PGN merge, there will be one clear 'biggest' utility.

    Anyone else have more information they'd be willing to share?

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  6. DP - Regarding EXC, I like it a lot. It took a hit recently due to the Japan nuclear crisis. But of the stocks that yield >4%, I find this one of the safer bets. It has solid financials, and being a utility, should be pretty safe. Has a "wide moat" per M*.

    With MMA rates being so bad, and bonds looking to crash as rates rise, I have put a lot of $$s into EXC as one alternative. I know its possible it could lose some value, but I think it should do well long term.

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  7. Regarding EXC, it has had negative EPS and revenue growth over the last three years. It also has not raised the dividend in two years, as Partisan mentioned earlier. It also has some unfunded pension issues arising.

    In regards to utilities as whole, I don't find a lot of them undervalued. Many are squarely in fairly valued territory or worse. In this space I really like ED and D, but both are out of my range right now. I also think Southern is a great pick.

    Thanks for the article Partisan!

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  8. Hey all,

    I'm not sure what happened to the other 5 comments that were on this post. I believe when Blogger was conducting maintenance the last few days they somehow did not get put back on.

    DP

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  9. Any opinion on Xcel(Xel) Energy?

    ReplyDelete