Look Overseas For Great Utility Stocks
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Utilities are the classic “widow-and-orphan” stocks—meaning they are slow and steady providers of dependable income. While earnings per share growth isn’t going to take anyone’s breath away, utilities operate in a highly regulated industry and thus aren’t likely to collapse. Even in a dire economy, utilities provide investors the certainty of reliable earnings and dividends.
For investors who also see the importance of geographical diversification, there are a number of very interesting international utilities that provide many of the qualities utility investors crave. These stocks can be a great source of income, and better yet, some of them are trading at extremely attractive prices.
Two major considerations: valuation and dividends
PPL Corporation (NYSE: PPL) and National Grid (NYSE: NGG) are similar utility stocks, in that they both do business in the United States and Great Britain. PPL is based in the United States, while National Grid is located in the United Kingdom, yet the investment case for both PPL and National Grid is very much the same. Both companies have performed well on an underlying financial basis, yet continue to trade for extremely attractive valuations. PPL and National Grid currently exchange hands for roughly 12 times their trailing earnings per share.
Both companies performed admirably in what proved to be a challenging 2012. PPL reported full-year earnings of $2.60 per share, down from $2.70 per share the year prior. These results reflect the effects of the company’s issuance of stock during the year to fund an acquisition. That being said, PPL had forecast its 2012 earnings to come in between $2.37 to $2.47 per share, meaning the company significantly exceeded its own expectations.
National Grid also struggled through a challenging 2012. The company’s revenue and operating profit fell 4% and 6%, respectively, during the year ended March 31. However, these declines were due largely to the impacts of two separate major storms in the United States, according to the company. Management points investors to the fact that National Grid realized 8% growth in adjusted operating profit during the year.
On a positive note, both National Grid and PPL hold true to one important aspect of a utility’s traditional reputation: paying hefty dividends to shareholders. PPL yields 4.9% at recent prices and has increased its dividend in 11 of the last 12 years; the new dividend rate of $1.47 per share annualized reflects a 177% increase over that 12-year period.
National Grid recently provided investors with an updated dividend policy going forward. In a statement released in late March, the company stated its full-year dividend growth would not be less than the increase in average RPI (Retail Price Index, a measure of inflation in the United Kingdom).
Management believes this new policy supports National Grid’s stated goal of providing a competitive dividend to its shareholders as well as leaving the company the financial flexibility to finance its future growth. As a result, it seems prudent for investors to reasonably expect dividend growth to be in the low-to-mid single digits going forward. In the meantime, investors can enjoy National Grid’s juicy 4% yield.
An interesting alternative
For investors who’d like to capitalize on emerging market opportunities, CPFL Energia (NYSE: CPL) allows you to do just that while simultaneously providing your portfolio with huge income. CPFL is one of the largest utilities in Brazil, a member nation of the BRIC countries that collectively are poised to lead the trend in growth in developing economies.
CPFL is more expensive on a P/E basis than both PPL and National Grid, exchanging hands for around 17 times its trailing twelve-month earnings per share. However, the company more than compensates investors for that in the form of a huge dividend, which amounts to more than 6% annualized according to Yahoo Finance.
CPFL also has a more pronounced growth trajectory to justify its higher valuation profile. The company recently reported its fiscal fourth-quarter results, which saw net operating revenue soar 25% higher year over year.
The bottom line
Investors of utility stocks look for consistency of results and dependable dividends, and these three stocks fulfill both those objectives. Furthermore, each of them provides an interesting alternative to the tried-and-true domestic utility stocks.
If you’re an investor who prefers to not have to keep your eyes glued to every piece of market-rattling news, these stocks can provide a necessary dose of stability to your portfolio. Electricity is something people will use regardless of the prevailing economic environment, and as a result, these stocks will keep profits and dividends flowing to investors for many years to come.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends National Grid plc (ADR). 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!