Which Utilities Company Can Make You Rich?
Marina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For many years, utility stocks have been considered solid and reliable investments. Customer electricity demand grows, and utilities benefit while investors feel excited. However, those times may be about to change. In this article, I aim to deliver a clearer picture on where the utilities Great Plains Energy (NYSE: GXP), Duke Energy (NYSE: DUK) and American Electric Power (NYSE: AEP) stand. My argument makes a largely statistical case for suggesting which stock is the best bet for your profits.
Great Plains Energy has a diverse generation platform of more than 6,600 MW of capacity. The company's generation mix is largely dominated by coal. Coal is used for 83% of the power generation, while nuclear fuel makes up approximately 14% of the remaining generation. At a time when gas prices were significantly lower and the Environment Protection Agency was hot on the heels of utility providers, urging them to switch to cleaner sources of fuel, Great Plains Energy stuck with coal production and is now placed better than its competitors as gas prices have skyrocketed.
Duke Energy develops cost saving initiatives to reach earnings base growth. On May 30, the company received rate case approval from North Carolina Utilities commission. That provides the total increase in rates of $178.7 million, or an average increase of 5.5% for all customers, over the 2013-2014 periods. Nevertheless, even with the approved rate increase, the company's rates remain below the national average. The approved rate increase will be used to recover investments already made to modernize the system and ensure safe and reliable service for customers every day.
American Electric Power delivers electricity to more than 5 million customers in 11 states. On July 17, the company terminated its $1 billion credit agreement, dated February 13, 2013, and entered into a $1 billion Term Credit Agreement, dated as of July 17, 2013. This is a replacement Credit Agreement entered into to provide additional liquidity during the corporate separation process for Ohio Power Company.
Financials and stock performance
Great Plains Energy's EPS has been fluctuating for the last 5 years, making a gain one year and having a dismal performance in the next. The company's payout ratio is at 63% and is not very promising, especially when the utility company's dividend payment was almost twice the current amount in 2004, while having a payout ratio in the 60%-range.
While the company's margins have improved, its revenues are consistently worse than they were during the 2004-2007 period. Even after four years of recovery following the global demand crisis, the utility company looks unable to return to a more rewarding path.
Duke looks like a smart investment option for the profit seeking investor, as it delivers an attractive dividend yield of 4.3%. Dividends paid by the company are supported by its high operating cash flow yield of nearly 11%. Also, Duke has a long term earnings growth target of 4%-6%, compared to analysts expectation of 5.5%. As a dividend paying utility, Duke's stock performance remains exposed to changes in treasury yields.
American Electric Power has been increasing its funding for pension liabilities, and reducing its pension liability gap. This has improved the balance sheet for the company, as risk of underfunding the pension liability has decreased. The company provides an attractive dividend yield of 4% and sports an estimated five years growth rate of 3.6% and a PEG of 4. Based on these metrics, American Electric Power seems to be lagging behind its competitor Duke Energy. The company's management intended to maintain its dividend payout ratio in the range of 60% - 70% and grow its dividend in line with earnings growth.
Great Plains Energy caters to a smaller audience than the competitors, yet it also has the benefit of being small and growing swiftly. Over the past three years, Great Plains Energy`s revenue growth and net income growth has been eclipsed by Duke. Duke also provides the highest yield on its stocks, and what is even more favorable is the company's market cap being the largest by a big margin. Great Plains Energy does, however, looks like the most undervalued stock of the three utility companies.
Expectations for future
Great Plains Energy Company’s future depends on two things: the Missouri and Kansas GDPs, and the company's margins. Kansas’ GDP, forecasted by the Greater Kansas City Chamber of Commerce, shows growth throughout 2013, that is expected to continue until mid second quarter 2014. Furthermore, with colder weather coming up in the second half of the year, the company can expect the cyclical energy spike as electricity consumption picks up with the use of heating systems.
There are positives coming out concerning the economy of Kansas, but the effect this will have on Great Plains Energy is speculative at best. I maintain a pessimistic view of the company’s potential because Kansas’ GDP growth in 2011 was 2.1% and it grew 2.4% in 2012. This did not have a great effect on Great Plains Energy.
Duke Energy is expected to experience a rate base growth of 4%, from 2013 through 2015. Another important earnings driver for this company is the cost cut initiatives. The company strives to reduce non-fuel operating and maintenance expenses by 5%-7%. Expected decrease in costs might be achieved by functional consolidation, system consolidation and improving the supply chain process.
American Electric Power has been increasing its funding for pension liabilities, and reducing its pension liability gap. This has improved the balance sheet for the company, as risk of underfunding the pension liability has decreased. The company has a lower estimated five year growth rate of 3.6% as compared to its peers' average of 4.10%. Moreover, a dividend yield of 4% and a debt-to-equity of 123% for American Electric Power seem worrisome compared to its peers. However, coal fired power plants for American Electric Power are located near coal mines, which give it a competitive edge for the use of coal instead of natural gas for power generation.
Duke Energy seems a sensible choice for investors who are looking for exposure to a large and diversified utility. With a decent dividend yield, a long term earnings growth target of 4%-6% and cost cut initiatives, Duke Energy is the best solution to your investment in the given selection.
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Marina Avilkina has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!