Saturday, February 25, 2012

5 Utilities Worth a Look

In 2012 the utility sector has lagged other sectors and the market as a whole.  This is a welcome change from last year.  I decided to take a look at a small list of companies to prepare myself for future purchases.  I like the utilities sector because they sell a product every person and business needs, it's easy to find a nice yield, and they have localized monopolies.  I place emphasis on the region of the country they are located to hopefully capitalize on population growth.  It would be foolish to buy an electric company in Detroit, for example, where people are leaving en masse.  More people means more electricity use.

At first I wanted to discover attractive water utilities since I don't own any.  Unfortunately I wasn't able to find any water utes worth my hard earned money.  It seems they either have low yields, high payout ratios, or low dividend growth rates.  So I'm left with electric and gas utilities, nothing wrong with that.  With the utility sector I expect to get a yield of at least 4%, but have lower expectations of growth and payout ratios. 

Alliant Energy (LNT)
Industry: Electric & Gas Utilities
Region: Wisconsin, Minnesota, Iowa
Pop. Growth: WI:0.44%, MN: 0.77%, IA: 0.52% (USA: 0.91%)

P/E: 15.92
P/B: 1.62
Long Term Growth (est.): 4.75%
Total Debt/Equity: 92.53%

Yield: 4.16%
Payout Ratio: 62.27%
Div. Growth Rate (5yr): 7.22%
Streak: 9 years

Alliant Energy is an electric and gas utility based in the Midwest.  About 83% of revenues comes from electricity; 15% from natural gas.  Roughly 53% of power is generated with coal, only 2% gas, 2% wind, and 43% purchased from other companies.  I like LNT for its valuation and dividend metrics.  It has a nice yield with decent growth potential.  Compared to other utilities I researched it has lower debt.  LNT seems to rely heavily on coal to produce power.  Over 40% is bought from other companies.  It does not make use of hydro at all, and only 2% comes from gas which is a cleaner option.  Population growth in the areas it serves is lower than the national average.  Overall LNT is a decent option, I'm not enthusiastic about its generation methods and the area it serves.  I would consider picking up shares at a price of $40.

Avista Corporation (AVA)
Industry: Electric & Gas Utilities
Region: Washington, Oregon, Idaho
Pop. Growth: WA: 1.57%, OR: 1.06%, ID: 1.11% (USA: 0.91%)

P/E: 14.92
P/B: 1.25
Long Term Growth (est.): N/A (Fidelity says 5.68% next year)
Total Debt/Equity: 111.36%

Yield: 4.61%
Payout Ratio: 63.58%
Div. Growth Rate (5yr): 14.87%
Streak: 9 years

I own shares of Avista, and have been pleased so far.  As far as utilities go this one is solid.  It has favorable valuation and dividend metrics.  I like its yield and dividend growth potential.  I do not think it will live up to the 14.87% dividend growth listed in my analysis (I took this off, but I would be thrilled to receive 5-6% increases.  The area AVA serves is seeing population growth far greater than the national average which could mean more customers in the future.  About 2/3 revenue is from electricity; 1/3 natural gas.  AVA relies heavily on environmental friendly power generation sources.  50% of power comes hydro, 35% natural gas (a lot cleaner than coal), 10% coal, 2% biomass, and 2% wind.  I have read about concerns that global warming might impact hydroelectric power generation, but have seen no definitive proof.  I would be interested in adding to my AVA position around $24.50.

Emera, Inc. (EMRAF / EMA on TSX)
Industry: Electric & Gas Utilities
Region: Nova Scotia, Maine, Massachusetts, Grand Bahama, St. Lucia
Pop. Growth: NS: 0.9%, ME: -0.01%, MA: 0.61%,G.B.: 0.60%  (USA: 0.91%)

P/E: 16.90
P/B: 2.57
Long Term Growth (est.): 6.55%
Total Debt/Equity: 222.17%

Yield: 4.04%
Payout Ratio: 67.84%
Div. Growth Rate (5yr): 8.35%
Streak: 5 years

Emera is the most interesting utility that made my list today.  I spent time researching Canadian utilities and this is the best one I could find.  First of all this corporation is Canadian, which means withholding taxes will be incurred on the dividend.  You can avoid withholding taxes by putting it in an IRA or ROTH IRA.  There is a weird tax rule which allows this.  I own a different Canadian Corp in my ROTH, it is true.  The dividends are paid in Canadian dollars and will be converted to USD for American investors.  With Emera you get a lot of diversification.  It does business in Canada, USA, and Caribbean countries.  This company has been paying and increasing dividends since 1992 with annual dividend increases the past 5 years.  There have been dividend freezes from time to time, but no reductions.  With utilities I do not expect endless annual increases.  Emera generates 57% of power from coal, 21% gas, 11% hydro, 6% wind, and 5% imported.  It is trending away from coal.  I read the company is shooting for a 70-75% payout ratio, I expect to see healthy dividend increases down the road.  I will be spending more time researching this company, but currently have a $31 target buy price in mind.

Southern Company (SO)
Industry: Electric Utilities / Wireless Communications
Region: Georgia, Alabama, Florida, Mississippi
Pop. Growth: GA: 1.32%, AL: 0.48%, FL: 1.36%, MS: 0.38% (USA: 0.91%)

P/E: 17.47
P/B: 2.23
Long Term Growth (est.): 5.85%
Total Debt/Equity: 210.62%

Yield: 4.24%
Payout Ratio: 72.86%
Div. Growth Rate (5yr): 4.05%
Streak: 10 years

The Southern Company is one of the largest utilities with a market cap of $36.8B.  It is a huge regulated electric utility operating in the southern region of the U.S. (as if the name didn't give this away HAHA).  It also generates power sold to other utilities.  SO is currently building the first new nuclear power plant on U.S. soil in 30 years.  I am in favor of nuclear energy, to me this is exciting.  The reactors are being built in Georgia as an addition to an existing nuclear facility.  SO has a lot experience with nuclear energy, I trust them with the responsibility.  SO sources of generation: 58% coal, 25% oil and gas, 15% nuclear, 2% hydro.  What I like about The Southern Company is that they are located in a fast growing region of the U.S.  The south is seeing a population boom.  I like the dividend yield and the fact the company is a dividend contender.  While SO doesn't sell natural gas, it has diversified into other businesses such as fiber optic solutions and a cell phone service.  It seems to me the valuations and payout ratio are kind of high.  I also worry about hurricanes.  The last thing an investor needs is another hurricane Katrina.  I believe SO is a quality company; I have a buy target of $41.

Westar Energy (WR)
Industry: Electric Utilities
Region: Kansas
Pop. Growth: KS: 0.64% (USA is 0.91%)

P/E: 15.22
P/B: 1.30
Long Term Growth (est.): 4.22%
Total Debt/Equity: 127.51%

Yield: 4.57%
Payout Ratio: 68.28%
Div. Growth Rate (5yr): 5.06%
Streak: 7 years

Westar Energy is the largest electric utility in Kansas.  About 77% of electricity is generated by coal, 13% nuclear, 8% gas, and 2% wind.  The company is spending a lot of capital on projects to reduce emissions of their coal plants.  WR offers an attractive yield with dividends increasing faster than inflation.  Nothing stood out when I researched the company, but it seems to be a good candidate.  I will spend more time looking at WR, I would consider picking up shares around $26.75.

I added these companies to my watch list with the exception of AVA (I already own it).


  1. Timely post.

    I'm currently looking into utilities, and I'm thinking about rolling my XOM profits into a couple utilities. I'm specifically looking at AVA and UNS right now, two you own. I think both are solid, and of the ones you listed above AVA and SO are preferable for me...but SO appears a little expensive right now. AVA looks much more attractive from a value standpoint. UNS looks good too.

    I like DUK as well, but that one also looks expensive.

    I came extremely close to opening positions with UNS and AVA late last week, but got too busy at work to make time for the buys. We'll see if that was a blessing or a curse.

    Best wishes!

  2. Yeah it was time for me to take another look at the sector. I had utility stocks in my watch list and couldn't remember why I was following them. I might take a look at materials or consumer discretionary next week if I have time. I love doing research.

    Yes I also like UNS, but didn't include it in this list because I'm not looking to buy additional shares right now. Unisource is another utility based in a fast growing region of the country. According to Wikipedia, Arizona is the 7th fastest growing state. Washington is 6th (AVA). Georgia is 9th (SO). In the past I read UNS was targeting a 60% payout ratio. It's due for an increase very soon and the payout is already at 60%. I don't think we'll see a large increase this year. I'd be happy with a 5% raise.

  3. Thanks for this informative survey of utilities. I don't have any utilities in my portfolio yet, but I have recently started to pay more attention to that sector. Of the 5 listed above, AVA is the most attractive to me.

  4. In my opinion AVA is attractively priced right now compared to others. It has a higher beta than most utilities, it might work to your advantage in a downturn.