I'd Buy One of These Three Electric Utilities Companies Today
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The summer heat is giving me a burning desire for electric utilities companies. Before I invest, however, I want to make sure that my investment will keep my portfolio warm and cozy for many years ahead. That's why I've taken a look at the demand for electricity in the areas where these three firms operate, as well as the firms' regulatory relations, before deciding whether to purchase a stake in these stocks.
Calpine will profit from high Texas demand
Calpine (NYSE: CPN) is in the right place at the right time, and I'd buy this stock today if I had room in my portfolio of the best companies. As a major operator in Texas, the firm is in the middle of a period of increased demand for its power. Staggeringly hot summer temperatures have many people in Texas scrambling to cool themselves with air conditioners, and that increased demand can't be accommodated all the time. This is the second year that the demand has exceeded the supply in Texas. That creates a massive amount of business and potential growth for Calpine.
The firm's Texas operations account for about 30% of the company's generating capacity. Furthermore, regulators in the state aren't as steadfastly opposed to rate increases as they are in other states. That means more potential profits for Calpine, and increased returns for investors. The company also looks to be undervalued, as it went through a bankruptcy debacle due to the Enron scandal. It is once again public and ready to make use of its efficient power fleet. The gas-fired plants at Calpine are likely to experience even greater demand -- particularly in Texas and California -- because of nuclear plant closures.
Edison has strong relations with regulators
Consolidated Edison (NYSE: ED) crossed its 200-day moving average on July 11 as the company's stock sold for as much as $58.61 per share. That could give an indication that the firm is fairly priced. As a long-term investor, however, I don't pay a lot of attention to charts in my value assessments. Instead, I look at the fundamentals that can set these companies apart from the rest.
Consolidated Edison, for example, has a basic strategy that is easily understood by regulators and this helps it to attain deregulation better than many of its industry counterparts. While there are significant upgrades expected at the company, the firm will bask in the fruit of that labor in the years ahead. I would keep an eye on this stock, and make a purchase as some of its projects near completion. If you do decide to invest in Edison now, however, you will realize dividend yields of about 4%. Furthermore, the company has increased dividend yields every year for nearly 40 years.
Ameren is a mixed bag
Ameren (NYSE: AEE) is likely to profit in the years ahead as it improves its regulatory relations. This was shown through the passing of the Illinois Moderization Action Plan (IMPA), which provides a high level of certainty over regulation through to 2017. While that allows the company to have a steady flow of revenue in Illinois, the company does face challenges in Missouri. This is because Missouri has a regulatory lag.
The IMAP attracts me to this stock, as it makes the firm a safe investment on that front. I would keep an eye on the company's progress in Missouri before making a purchase, however.
Regulatory relations is key
The demand for these companies' electricity may be high and still growing, but the relations that these firms have with regulators will set them a part from their competition. These investments are secure because electricity demand will only increase in the years ahead, but the relationships with regulators will determine where profits will be capped. Any decrease in the restraints on these firms means greater profits for shareholders.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Phillip Woolgar 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!