Stocks to Cozy Up to Before Winter
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Old Farmer's Almanac has predicted a colder winter than usual, especially for the Northeast and Mid Atlantic, so I'm throwing out a few names to keep your portfolio warm when the cold winds blow.
Naturally, there's an electricity utility that covers most of these areas and has a 5.10% yield with 6 million customers. Con Ed you say? No, it's FirstEnergy Corp (NYSE: FE), a utility company that spans the mid-Atlantic, Ohio, New York, and New Jersey. The company just reported on Nov. 8 and rose 2%. The dividend yield was 6% before it reported, and the payout ratio is 81%. The company beat on EPS estimates, which is perhaps why, despite lower revenues and cutting guidance, the shares rose. Lower numbers were already expected due to a warm winter, contributing to lower revenues.
Now, when most companies blame the weather, it's usually just a lame excuse; but in the case of utilities it's not. FirstEnergy competitor American Electric Power Co (NYSE: AEP) also reported softer numbers due to bad weather. Looking at my utility bills, it seems the company should have made more money. To be fair, this quarter also included many one-time charges, regulatory, tax, merger costs etc.
Maybe you would prefer a company with some exposure to natural gas that also covers most of the same geographical area. That would be Exelon Corporation (NYSE: EXC), a utility company that provides electricity and natural gas to 6.6 million customers in Maryland, Pennsylvania, and northern Illinois. Exelon just acquired Maryland-based Constellation Energy and Baltimore Gas and Electric this year, and that may be part of the reason for a UBS upgrade on Nov. 8 from sell to neutral--a turnaround from the sell call made less than two months ago. Fool writer Sean Williams likes the name and their foray away from nuclear generation as they have just inked a deal with First Solar for a solar grid in Maryland.
The company just reported on Nov. 1, announcing EPS of $0.77, which outperformed earlier guidance but was down considerably from the $1.12 a share from Q3 2011. Unfortunately the company is still adding up costs borne after Hurricane Sandy. They did guide slightly higher. So, right now Exelon is trading at a 17.60 P/E. But the most significant part of the call is this direct quote from CEO Christopher Crane on the all-important dividend:
"It is, of course, also possible that the power prices will not recover as completely or as rapidly as our fundamental views suggest. In that regard, with the actions we've taken, we have time to see how things play out. But if they do not play out favorably in the next 6 months, revisiting our dividend policy will be in the range of options for preserving our investment-grade rating that management and the board will need to consider."
The ex-dividend date is Nov. 13. Cutting that 6.60% yield is not going to make for happy campers, but with a payout ratio currently standing at 112%, it's a necessary evil. Later in the call Crane reiterated, in a more reassuring way, "Investment-grade ratings and maintaining the dividend are our top priorities." Even if you like the name, you'll have to keep an eagle eye on natural gas prices and electricity costs. One other risk in this investment is that the corporate governance risk is rated High for compensation. They do believe the merger is already partially accretive, with the synergies it generates expected to be fully accretive by 2014.
That said, Steven Cohen, famed founder of SAC Capital, has a $21 million stake in Exelon as of his last 13-F in October. Frankly, the company just announced on the call they were putting off several projects for a few years to maintain that investment grade rating, so it seems like they are committed to maintaining the dividend.
What about Consolidated Edison (NYSE: ED), better known to its customers as Con Ed? It provides natural gas and electricity to those colder-than-usual areas predicted by the almanac: New York, New Jersey, and northeast Pennsylvania. It has low corporate governance risk in all areas, and the yield is 4.20%, with a more conservative payout ratio of 67%. The P/E is 14.81, and RBC Capital Markets just upgraded Con ED to sector perform and raised the price target to $63.00. It's too late to get the next dividend, as Con ED goes ex-dividend on Nov. 9; but you may want to keep it on your radar if it sells off due to expected dividend tax hikes in 2013.
There don't you feel more toasty already? The most stable company is Con Ed but with the lowest yield, FirstEnergyCorp is a growing mid-Atlantic and midwest utility with a better yield, and Exelon is speculative going forward, but you have only a day or so to get in before the ex-dividend date.
leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon. 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.If you have questions about this post or the Fool’s blog network, click here for information.