5 Excellent Utilities for Safety and Yield
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recommended these five utilities in May and June of 2011. Since then, the share prices have remained relatively stable despite turmoil in the markets. I still suggest them because of their healthy growth prospects, and for some, there are dividend payments.
AES (NYSE: AES) is projected to grow non-GAAP EPS by 29.7% in 2012. The company is a global power company that provides energy in 28 countries. It is also #150 in the Fortune 500. In 9M11, revenues grew by 11.37% to $13.117 B. Non-GAAP EPS went up by 8.57% to $0.76, but GAAP EPS dropped by 41.38% to $0.34. In Q4 2011, AES stated that non-GAAP EPS should be between $0.21 and $0.27 in 2011, with analysts expecting $0.24. The company also has a debt to equity ratio of 2.97.
Due to the global nature of the company's operations, it stands to benefit from even stagnant to slow economic growth. Consider that, in 9M11, revenue increased by $1.34 B to $13.117 B, primarily from: (i) favorable impacts of foreign currency of $600 M; (ii) contributions from new businesses in Northern Ireland, Chile, and Bulgaria; (iii) higher prices and volumes in Chile. Additionally, in 2010, the company grew revenues in Latin America by 18.06% to $11.503 B; in Europe, revenues increased by 66.09% to $1.362 B; and in Asia, revenues rose by 64.80% to $618 M.
In the medium-term, the company is targeting markets with high growth, where it has a competitive advantage. On Nov. 28, the company closed its acquisition of DPL Inc. for $4.7 B in cash and assumed debt. It is the parent company of Dayton Power & Light Co. and serves over 500,000 customers in West Central Ohio. The company also has a new CEO, Andrés Gluski, who has been executive VP and COO since 2007.
The Reuters Research Average price target is $16.00. At a current share price of under $13, this is a buy. I recommend this for investors who are looking for a utility with significant exposure to the emerging markets, but not for risk-averse individuals because AES does not pay a dividend. Over the past year, AES is -2.62%.
CenterPoint Energy (NYSE: CNP) (formerly Reliant Energy) offers electric transmission and distribution (T&D) services in the Houston metro area, and sells and delivers natural gas to 3.2 M customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma, and Texas. It also has two interstate pipelines, provides field services, and markets natural gas in the eastern US.
The company’s Q3 results came out on Nov. 2. In 9M11, excluding the effects of the resolution of a Texas Supreme Court proceeding, net income came in at $429 M (+35%) or $1.00 per diluted share (+28%). The company’s guidance stated that adjusted EPS should be between $1.04 and $1.14. For 2011, the Street expects adjusted EPS to be $1.14 (+17.52%) alongside revenues of $9.0 B (+2%). The company also has a debt to equity ratio of 2.02.
There are several positives that should provide a good backdrop for growth. Looking through history, over the trailing 12 months, operating cash flow was healthy at $1.852 B, and in 2010, net income returned to 2008 levels with $442 M, and the trailing 12 months (TTM) net income eclipses the 10 year history, coming in at $1.364 B. Also, the return on equity is 37.19% over TTM.
In its electric T&D division, the company has 2.1 million customers, demonstrated consistent customer growth, and revenues have grown every year since 2006. In natural gas distribution, 3.3 million customers provided $231 M in revenues for the company in 2010, which is +85% since 2006. On Nov. 3, the company announced the acquisition of Asgard Energy, based in Denver, Colorado. The acquisition includes more than 1,400 large volume commercial and industrial customers and 13,000 individual accounts in Nebraska and Wyoming.
The Reuters Research Average price target is $21.54. With shares currently trading above $19, CenterPoint is a good buy. Additionally, CNP shares have a dividend yield of 4.1%. Over the past year, CNP is up by 21.59%. Here is a recent company presentation (pdf).
California Water Service Group (NYSE: CWT) is the parent company of California Water Service Co., Washington Water Service Co., New Mexico Water Service Co., Hawaii Water Service Co., CWS Utility Services, and HWS Utility Services. They provide water service to roughly 2 million people.
Through Q3 2011, revenues grew by 12.35% to $398.8 M, and GAAP EPS was $0.86 (+8.86%). For Q3, rate increases added $21.5 M, and revenue from sales to new customers added $1.0 M. For Q4 2011, the Street expects non-GAAP EPS to increase $0.17 from $0.12 in Q4 2010. Going forward, for 2012, seven analysts expect non-GAAP EPS to rise by 27.27% to $1.26.
Until the housing market recovers, at best, the company can grow its customer base at a meager rate. Yet, the company has managed to add customers every year since the beginning of the housing market crash in 2008. It also grew revenues per customer by 10.51% within that period. Additionally, the company has stated in its 10K that it seeks to obtain more customers through strategic acquisitions or mergers. Given these drivers, I understand why analysts are bullish on CWT.
The Reuters Research Average price target is $21.00, and it currently trades under $18. I believe that this is a buy for more risk-averse investors. In addition, CWT has a current yield of 3.4%, and paid its 267th consecutive dividend on Nov. 18. CWT is -4.78% over the past 12 months. The company also has a debt to equity ratio of 1.05.
New Jersey Resources (NYSE: NJR) provides natural gas services and renewable energy including transportation, distribution and asset management from the Gulf Coast to the New England regions, including the Mid-Continent region, the West Coast and Canada. For FY 2011 ending Sept. 30, 2011, operating revenues rose by 14% to $3.009 B, but GAAP EPS decreased by 13.5% to $2.44. Analysts also expect non-GAAP EPS to rise in FY 2012 to $2.79 (+8.98%).
Management believes that it can gain 12,000 to 14,000 customers through FY 2012 in its New Jersey Natural Gas (NJNG) subsidiary. According to Argus, this would add about $3.4 M to annual gross margin. With the addition of 6,783 new customers in FY 2011, compared with 6,189 last year, NJNG is on its way to meeting this target. Along with the 641 existing NJNG customers who converted their heating systems to natural gas, this growth is expected to contribute $3.5 M annually to NJNG’s gross margin. As of Sept. 30, 2011, NJNG served nearly 495,000 customers. Overall, the new customer annual growth rate for 2011 was 1.4%. The company also has the distribution to tap into the shift to natural gas heating in New Jersey and the Northeast. Based on the American Community Survey of the U.S. Census Bureau, 71.7% of New Jersey households heat their homes with natural gas. In 2000, the figure was 66.8%.
The Reuters Research Average price target is $46.83, but it currently trades under $48. I believe that there is still room for growth in EPS for the company, but to be safe, keep this on your watch list. NJR has dividend yield of 3.1%. The company raised the quarterly dividend to $0.38 from $0.36 in November 2011. This dividend has been raised every year for the past 17 years. NJR is +8.99% since Jan. 18, 2011. The company also has a debt to equity ratio of 0.55.
South Jersey Industries (NYSE: SJI) distributes natural gas in the seven southern-most counties New Jersey, and acquires and markets natural gas and electricity. In its natural gas segment, it has approximately 350,000 customers with a 65% market share. For Q3 2011, the company missed consensus estimates of $0.10 in non-GAAP EPS (economic earnings) and $3.0M with $0.01 and $0.4 M in revenues, but in 9M11, non-GAAP was $1.84 (+$0.01) alongside revenues of $55.2 M (+$0.4 M). The company expects to grow economic earnings by 7% to 11% in FY 2011. Economic earnings have grown each year since 2006 (pdf).
Its subsidiary, South Jersey Gas, was approved in March 2011 by the New Jersey Board of Public Utilities (BPU) to extend the company’s Capital Investment Recovery Tracker (CIRT) program through October 2012. The purpose of the project is to replace aging pipe and make other system improvements. This initiative also creates jobs, and so shines positive light upon the company. Gov. Chris Christie definitely takes note of it in his revisions to the NJ Energy Master Plan.
In June 2011, the company filed a petition with the BPU requesting recovery of CIRT II investments through a 0.5% increase in base rates. This petition is currently pending. In October 2011, the company filed a petition with the BPU requesting an additional extension of the CIRT II program allowing the company to accelerate $40 M of capital spending into 2012 and $50 M of spending into 2013. The petition also requests recovery of the additional $40.0 M investment in 2012 through a 0.91% increase in base rates effective Jan. 1, 2013. This petition is also currently pending.
Generally for all utilities, until the housing market recovers, at best, the companies can grow their customer base at a meager rate. Yet, the company managed to grow its customer base by 1.1% in the 12 month period ending in March 31, 2011. This was done mainly through converting customers to use natural gas from other fuel sources. For 2011, the company expects to add 3,800 more customers (+1%) through such conversions. Data from the American Community Survey above also portrays this general shift in New Jersey. Additionally, with rising natural gas production from the nearby Marcellus shale, the company has the potential to acquire more customers and create a long-term supply of natural gas.
The Reuters Research Average price target is $57.86. SJI currently trades below $55.50, so this is a buy. I recommend SJI for investors looking to grow their funds in a conservative manner. SJI also has a current yield of 2.5%. On Nov. 21, 2011, the company raised the regular quarterly dividend to $0.4025 from $0.365. This is also the company’s 60th consecutive year of paying dividends. SJI is +2.89% since Jan. 18, 2011.
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