An Insider Bought This Utility Stock
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to a filing with the SEC, the spouse of Piedmont Natural Gas (NYSE: PNY) Board member Phillip Wright purchased 13,000 shares of the company’s stock on Dec. 27 at an average price of $30.69 per share. We track insider trading activity- including when family members of an insider are buying- because even in these cases buying the stock reduces diversification, which is generally not rational unless there is a good deal of confidence in the company. This is one explanation for why insider purchases tend to be bullish signals (learn more about studies on insider trading). Our database of insider trading filings shows that Wright had previously purchased shares of Aegion Corp (AEGN), where he also serves on the Board of Directors, at about $16 per share this past June; that stock currently trades at above $21. Research Wright's insider activity.
Piedmont Natural Gas Company is a natural gas utility serving customers in the Carolinas and Tennessee. Its fiscal year ended in October, and the company recently filed its 10-K; revenue was down 22%, due to lower natural gas prices. However, because the utility buys that natural gas in turn, its cost was down a similar amount and so gross margins were flat for the year compared to the last fiscal year. Lower utility interest charges led to moderately higher net income and earnings per share. Piedmont reported $1.66 in EPS, for a trailing P/E multiple of 19 given the current market capitalization of $2.2 billion. That is rather high for most value investors, considering that the company doesn’t have many growth prospects; higher natural gas prices push up revenue and costs alike.
Instead, as with many other utilities, a case for investing rests on the stock’s weak correlation with the broader market- the beta is 0.5- and a dividend yield close to 4%. These traits are appealing to income investors, as well as to defensive-minded investors who want to limit their risk (or who believe that the rest of their portfolio already has plenty of risk). The quarterly dividend payment has increased by a penny each year since 2006, so we feel fairly comfortable that Piedmont Natural Gas Company, Inc. will continue to return cash to shareholders in this fashion. If it increases by 1 cent per share again in 2013, then the forward dividend yield would come in at 4.0%.
Two other distributors of natural gas are AGL Resources (NYSE: GAS) and Integrys Energy Group (NYSE: TEG). The dividend yields at these two companies are even higher than at Piedmont, above 4.5% in both cases and above 5% for Integrys. Betas are similar, in the 0.5-0.6 range, so AGL and Integrys are about as protected from a downside surprise in the economy as Piedmont is. We would also note that Integrys has P/E multiples in the teens, and so may offer slightly more value. Even with the insider activity at Piedmont, these stocks might be better choices for investors looking for yield.
Income or defensive investors may prefer electric utilities, such as Duke Energy (NYSE: DUK) and The Southern Company (NYSE: SO). These companies have much larger market capitalizations, above $35 billion in both cases, and their stock prices are even less correlated with the market indices given their betas of 0.1. Their dividend yields are in the 4.5% to 5.0% range, so they have somewhat higher yields than Piedmont as well. They certainly seem to have less macro risk, and with richer dividend payments as well we think they are better income stocks. See more cheap dividend stocks.
We don’t think there is much of an upside in a natural gas utility, as natural gas prices affect revenue and costs about evenly. Piedmont does look somewhat attractive in terms of its yield and weak relationship with the market, but other utilities seem to be even better on that score.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Piedmont Natural Gas Company and Southern Company. 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!