An Undervalued Utility? Do those Still Exist?

By Chad Henage - April 11, 2012 | Tickers: TEG, NEE, SO, XEL | 0 Comments

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A few years ago I ran the Motley Fool CAPS Screener looking for dividends of over 5%. A utility that came up on this screen was Integrys (NYSE: TEG). I checked into this company and found that there was a pretty decent utility hiding behind the complicated operating structure, but investors were worried that Integrys couldn't maintain its dividend. While Integrys did lose its status as a dividend aristocrat, the company maintained its payout. Today the company is a lot less complicated and has gotten back to its roots as a regulated utility. Based at least on its dividend yield the company's shares could be considered undervalued.

Back in 2009, Integrys operated two businesses. Integrys Energy Group ran natural gas utilities and Wisconsin Public Service Corp. The second business was Integrys Energy Services, which was an energy trading and resale operation. Though Integrys Energy Services was profitable at the time, the subsidiary needed credit to respond to volatile energy costs. In 2009 when credit markets were in shambles, the parent company decided to divest this business, causing the stock to drop 27% to $26.85. Less than three years later, the company is still paying the same dividend -- it was never cut -- and the stock sells for $51.31. With this as a background, is Integrys a good buy today?

At current prices, Integrys has a forward P/E of 14.74. With the company expected to grow future earnings by about 5%, this isn't a screaming value. However, the dividend yield on the stock is much better than some of its competition. The dividend appears safe -- in 2011 the company generated about $410 million in free cash flow and paid out about $210 million in dividends. With a 51% free cash flow payout ratio, the dividend appears very safe.

A concern about the company in the past has been its debt load. This concern seems overblown today. In the past three years, the company has paid down $522 million in long-term debt. In fact, in the last three years, the company's debt-to-income ratio has dropped from 0.84 to 0.62. If the dividend is safe and the balance sheet is getting stronger, then how does this company still carry a 5.3% dividend yield?

By comparison, look at some of these same numbers in other companies in the utility industry.

Even though all three companies have dividend growth, it will take a while for these yields to catch up to Integrys' 5.3% current yield. Their weaker payout ratios and debt-to-income ratios would seem to make Integrys a better buy.

Considering that Integrys has a higher current yield, lower free cash flow payout ratio, and a better balance sheet than many of its competitors, the company should gain more respect going forward. Before the company stopped growing its dividend in 2009, the company increased its payout for over 50 years. Could the beginning of the next 50 year streak be just about to begin?

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