The Safest Utility Stock?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know it sounds like an oxymoron to suggest that investors need to look for the safest utility stock. However, there are underlying risks in the utility sector that investors seem to be forgetting about. A simple measure, like a dividend’s payout ratio is being ignored in favor of the assumption that utilities always pay their dividends. Investors in companies like Exelon (NYSE: EXC) can unfortunately attest to the fact that dividends are not cast in stone. The good news is, for every Exelon there is an Integrys (NYSE: TEG).
Thinking Outside Of The Box
It seems like whenever an investor asks for a utility stock recommendation, the same names are always suggested. The stock answer is, if you want to buy a utility, go with Southern Co (NYSE: SO), Duke Energy, or Consolidated Edison. There isn’t anything wrong with each of these companies. However, I like to look for opportunities that others might have overlooked.
I regularly use the Fool.com CAPS Screener to find stocks. This stock screen delves into the collected intelligence of the CAPS community, combined with financial metrics, and stock characteristics. I wanted exposure to the utilities industry, and I wanted at least a 4% yield, so I went to the CAPS Screener first.
Who The Heck Are They?
One of the names the screener suggested was Integrys. The stock had an over 5% yield at the time, and I decided to put it on my list to research. In short, Integrys was a great regulated utility that also operated an energy trading business that apparently they didn’t feel comfortable with. However, Integrys was intent on spinning off or selling that business, and the rest of the company seemed to be doing just fine. Since my discovery, Integrys has pared back their energy trading business significantly, and today it represents a regulated utility in the north-west.
I can honestly say, Integrys might be the safest utility in the industry. When it comes to their peers, I wanted to be sure the company was doing well, so I added companies like Exelon, Southern Co, and Wisconsin Energy (NYSE: WEC) just for comparison. From what I can see, Integrys is doing the best of the bunch.
These 4 Measures Suggest Investors Should Check Into Integrys Today
The most obvious attraction of a utility stock is its yield. By this measure, Integrys pays a yield of about 4.85%, whereas Southern Co pays about 4.6%, Exelon pays 4%, and Wisconsin Energy pays about 3.4%. With a class leading yield, the company still doesn’t get talked about.
As if Integrys’ yield wasn’t enough, the company also sports the highest expected growth rate of the bunch. In the next few years, analysts expect the company to grow earnings by 5.5%, which just outpaces Southern Co at 4.8% and Wisconsin Energy at 4.9%. Unfortunately for Exelon investors, their company is expected to report an EPS decline of about 3.4% over the next several years.
The third measure really gets to the core of why Integrys looks the safest of their peers. Utilities use long-term debt to finance their operations, and sometimes this can lead to a high interest expense. To get a sense of the amount of interest a utility pays, I look at interest expense versus operating income.
If a company’s interest expense gets to the point of being higher than their operating income, investors should worry. After all, how do you pay dividends, when you can’t afford your debt payments? By this measure, Integrys is paying just 10% of their operating income towards interest payments. Wisconsin Energy has the next lowest percentage at 20.25%, Southern Co pays about 24%, and Exelon’s financial challenges are very clear, with a percentage of 122%.
In addition to a low percentage of interest expense, Integrys also has the best core free cash flow payout ratio of the group. Core free cash flow eliminates a lot of accounting adjustments and gets to the root of how much a company has on a regular basis. This measure simply uses net income, plus depreciation, and then subtracts capital expenditures.
Integrys’ core free cash flow payout is 49.80%, which is slightly better than Wisconsin Energy at 55.1%. This measure is far better than Southern Co and Exelon’s performance, as both of these companies reported negative core free cash flow last quarter.
The Bottom Line
It shouldn’t be too hard to understand why I own Integrys shares personally. For investors looking for a good yield, good growth, and a safe dividend, I haven’t seen a better performance across the industry.
Though Integrys won’t be found on a typical broker’s recommended list, I would suggest income focused investors add it to their personalized Watchlist today.
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Chad Henage owns shares of Integrys Energy Group. The Motley Fool recommends Exelon, Southern Company, and Wisconsin Energy. 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!