Income Investors: An Overview Of 4 Key Utilities

Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Utility companies can present excellent opportunities for income investors. But that does not mean that they make poor choices for other investors. Some utilities are investing wisely in unregulated businesses, while others are undertaking measures to position themselves for growth. The four companies below are all facing similar headwinds such as stiff competition, climate change, and government regulation. However, they are also benefiting from positive drivers such as new construction and operating licenses and new facilities. In this article, I will discuss four companies which could potentially present opportunities for investors based on the factors listed above.

Southern Company Inc. (NYSE: SO)

Southern operates via four operating companies; electrical utilities in Georgia, Mississippi, Alabama and Florida. Southern stock was trading recently at between $45 and $46 per share, near the high end of its 52 week range of from $46.69 to $35.73. It is trading at a price to earnings ratio of 17.7, and has a market capitalization of $38.5 billion, and pays dividends summing to $1.89 per year at present, for a yield of 4.3%

Southern for some time has been about as consistent a performer as there is in the utility sector, and 2011 did not disappoint. For the fourth quarter of 2011, Southern reported earnings of $261 million, or $0.30 per share, a sharp 11% increase from the fourth quarter of 2010. For all of 2011, earnings came in at $2.58 per share, a 7.6% jump when compared with $2.37 in 2010.

But the past is not the issue for excitement about Southern. As predicted, on February 9, 2012 the U.S. Nuclear Regulatory Commission issued to Southern a combined construction and operating license for two new nuclear reactors at the existing Vogtle facility. The units are a new design from Westinghouse, and the license was the first such issued by the NRC in 34 years. The project is expected to cost as much as $14 billion, which is a lot of money and technology in order to boil some water. Southern is further along in building a new coal gasification facility in Mississippi, a $2.4 billion project scheduled to go online in 2014.

Shorter term, analysts foresee earnings of $2.67 per share and $2.82 per share in 2012 and 2013. Southern has raised dividends every year since 2001. This is the kind of a buy and forget about it utility perfectly suited to conservative income investors.

Vectren Energy, Inc. (NYSE: VVC)

Vectren is best known as a dividend aristocrat that has raised its dividend now for 52 consecutive years.

Vectren is a combined cycle utility with about a million customers in Indiana and west central Ohio, Its stock was trading recently at almost $30 per share, near the high point of its 52 week range of from $30.69 to $23.65. It is trading at a price to earnings ratio of 17.2, and has a market capitalization of $2.4 billion. It pays a quarterly dividend of $0.35 per share, for a yield of 4.9%.

On the earnings side, Vectren is showing the steady growth I like to see from a utility. In 2011, Vectren reported earnings of $146.1 million, or $1.71 per share. This was despite a $23 million loss by one of Vectren's myriad of non regulated units, a natural gas business. 2010 earnings were $1.64 per share.

As mentioned, Vectren has an array of unregulated, mostly energy related businesses. These businesses accounted for $46.7 million of its 2011 earnings. These non regulated businesses, save the gas business, have further growth ahead and will continue to supply a larger share of Vectren's earnings going forward.

Analysts peg Vectren's earnings at $1.87 and $1.98 per share in 2012 and 2013, respectively. I believe this is an excellent equity for the income oriented investor.

PGE, Inc. (NYSE: PCG)

PGE, the holding company for Pacific Gas and Electric, is a large, combined cycle utility serving central and northern California. Its stock was trading recently at a little over $42 per share. Its 52 week range is from $46.96 to $36.84, and has a price to earnings ratio of 16.7. It has a market capitalization of $17.1 billion, and pays a quarterly dividend totaling $1.82, for an annual yield of 4.4%

PGE had a dismal year, which is a surprise to no one who remembers the San Bruno, California gas line explosion in 2010. It is now expected that PGE will pay over $1.7 billion in overall costs just to fix its allegedly faulty pipeline system, in addition to civil suits and fines. Chapter one of what will be several years of costs drove down 2011 earnings to $844 million, or $2.10 per share, compared to $1.1 billion, or $2.82 per share in 2010.

There is a bright side to the San Bruno tragedy. That is, one day it will be behind PGE, and earnings comparisons will look terrific. But for the next two years at a minimum, earnings will be depressed, and this equity should be avoided.

Avista Corp. (NYSE: AVA)

Avista is the former Washington Water Power Company, and is a combined cycle utility furnishing electric and natural gas service in eastern Washington and northern Idaho, and has limited gas service in Oregon. Avista also owns an unregulated energy management business, Ecova. Avista stock was trading recently at between $25 and $26 per share, near the high end of its narrow 52 week range of from $26.53 to $21.13. It has a price to earnings ratio of 14.5, and a market capitalization of $1.5 billion. Its dividend, which has been raised annually since 2003, now stands at $0.29 per quarter, for an annual yield of 4.6%.

Avista, like many utilities in the Pacific Northwest, has an environmentally friendly power supply mix. Hydrological power accounts for 27% of its generating capacity, while wood waste, coal, gas, and purchased power make up the balance. In the fourth quarter of 2011, Avista reported earnings of $24.6 million, or $0.42 per share. This was down about 7% from the $0.45 earned in the year ago quarter. For all of 2011, Avista reported earnings of $100.2 million, or $1.72 per share, up about 4% from the $1.65 per share earned in 2010.

What I find so interesting about Avista is the importance of the local snowpack to the company. If snowpack is inadequate, river volumes suffer, and Avista's hydrological power supply declines. The alternative to that renewable and inexpensive resource is additional reliance on expensive purchased power. And no one really knows the long term impact of global climate change on the northwest snowpack.

Analysts foresee very limited growth in earnings the next two years. I am a bit more optimistic, as I see Ecova helping to drive earnings up toward $2 per share by 2014. At that level, a share price of $30 is foreseeable, and growing dividends make Avista that much more attractive. I urge you to check it out.


The Motley Fool has no positions in the stocks mentioned above. DividendKings has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure