The Perfect Utility Portfolio
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Utilities are known, at least in developed countries, to be stable income generators. This is the case in the US, where the government sets reasonable rates of return to encourage infrastructure investments and high quality service. I chose a portfolio of my three favorite utility companies. They will offer stability through a low beta and a reasonable cash flow stream through dividends. All this, plus equity upside potential. What follows is a breakdown of my portfolio.
40%: Edison International (NYSE: EIX) is the holding company for Southern California Edison (SCE) and Edison Mission Energy (EMG). The company operates in two segments: an electric utility operation segment (SCE) and a competitive power generation segment (EMG). EIX's stock is 7% up in 2012 and I think that, with much better visibility on the cost of capital issue, there is considerable appreciation potential going forward. I was happy to see the GRC decision issued prior to the end of the year, since it removes a significant portion of SCE's regulatory uncertainty, hinting that the 10.4% ROE authorization will stay on track going forward.
Trading at $44.50, the company is being valued at 2013 x6.5 EV/EBITDA and x16.5 P/E. Plus, I expect $1.84 to be paid in dividends in 2013 and up to $1.90 in 2014. This would give investors a yield of 4.1% for 2013 and 4.3% for 2014. I like EIX, its fairly valued and provides a catalyst for its price to go up.
30%: Public Service Enterprise's (NYSE: PEG) operations are located primarily in the Northeastern & Mid Atlantic US. The company is one of the largest combined electric and gas companies in the United States, and I think its a good portfolio choice for its recent under performance versus the S&P 500 (the stock is down by 10% in 2012) and its stable cash flow operations. Given PEG's sustainable 2013 $1.50 dividend (which comes to a 5.1% yield at the current $29.80 share price) and its healthy balance sheet relative to peers, I would be willing to pay the price. PEG trades at 2013 x6.7 EV/EBITDA and x12.5 P/E.
30%: El Paso Pipeline Partners (NYSE: EPB) is a master limited partnership formed to own and operate natural gas transportation pipelines and storage assets. EPB's interstate pipelines systems serve the Rocky Mountain and southeastern region of the US. The company also owns and operates the Elba Island LNG storage terminal near Savannah, Georgia. EPB generates 90% of its revenues from fee-based long term capacity contracts, which provides predictable cash flows and, henceforth, dividends for investors. EPB trades at $37.30 (8% up in 2012) and, at current prices, I predict a 6.5% distribution yield. With its net debt to EBITDA at x4 and trading at 2013 x11.5 EV/EBITDA, I think EPB deserves its premium to peers given the high quality of the assets it owns.
These three companies can provide great stable cash flows, a lower beta than the S&P 500, and a growing dividend payout. At the proposed weights an investor would be generating a 31% beta and a 5.12% dividend yield for its portfolio. This is a reliable option for any investor looking for safety and current income in a shaky economy where interest rates are close to zero.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend El Paso Pipeline Partners LP. 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!