3 Utility Stocks Offering Substantial Yields
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When looking at the electric utilities, you need to change your perspective and look from a different point of view. These stocks are known for their defensive nature and dividend yields that are above average. In addition, this industry offers a below-the-average volatility compared to other industries. Therefore, investing in electric utilities is considerably less risky and may come in handy in uncertain times.
The industry is in the down of another era. The International Energy Agency predicted that the demand for electricity is likely to double within the next twenty five years, which means there will be enormous investments in this already gigantic industry. Investing in this industry today could return you great returns in the long term. I have looked for the top three electric utilities with substantial dividends, and a maximum P/E ratio of 18. All of the following companies have a minimum 5% dividend yield and a market capitalization of $4 billion according to finviz. While there are lots of electric utilities listed on the NYSE, only the following fit this criteria.
Entergy (NYSE: ETR) suffered from lower-than expected quarterly results, which was mostly because of declining revenue and weak demand. The stock took a haircut after posting year over year 46% lower profit results in Q3, losing nearly 15% in just twenty days.
The company is likely to keep struggling due to maintenance expenses, weak demand, low power prices, and higher income taxes. Entergy’s earnings are quite depressed nowadays, and maintaining dividends could become a problem. Many key stats are starting to give red flags. While the balance sheet is still relatively better-looking than most of the electric utilities, Entergy will pay a price if it wants to stay in the race. Just have a look at Entergy’s 5-year price chart. There were no declines this sharp, apart from the disastrous Lehman event.
The management plans a spin-off of its electric-transmission branch. As you know, spin offs mostly bring value to the mother company as well as the spun-off business. What’s more, Entergy just donated $200,000 for Hurricane Sandy relief. This kind move will surely attract public appreciation. This stock seems more like a long-term buy to me.
FirstEnergy (NYSE: FE) is another stock that is suffering from Hurricane Sandy. Actually, you wouldn’t want to touch FirstEnergy if you are not a dedicated dividend follower. The company has little to offer other than a fat dividend for some time. Almost all of its indicators are quite weak. There’s clearly distress since the beginning of August.
What caused the recent decline is that Q3 earnings fell 20% due to lower sales volume and revenue. However, management is taking precautions to ensure cost-effective operations by managing expenses. Moreover, the company is undergoing substantial change led by growing competition and low power prices. Assets and cash flow seem promising. No matter what the charts say, we are talking about one of the largest utilities in the US. It might not offer anything else apart from a fat dividend, but there will be better times. FirstEnergy will get back on its feet, and you may want to own it at that time. The company is slowly moving away from coal consumption and looking for cleaner energy sources to generate electricity. The demand for electricity just can’t die. Again, the stock is suitable for only long-term and dividend players.
Pepco Holdings (NYSE: POM) reported a 40% increase in Q3 profit despite declining revenues. Every electric utility is hit by prices, but Pepco is having a very soft landing here. There were very insignificant declines in the past weeks.
Pepco reported adjusted net income of $0.47 per share, surpassing the mean estimate of $0.42. Moreover, net income was 40% higher than the year-ago quarter. With these promising numbers, more and more analysts are getting behind this stock. The mean estimate for the next quarter has increased to $0.23 a share from $0.18 a share in the last three months. I believe the current price level offers a proper entry point.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!