Gabelli Sees a Bright Nuclear Future
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I own shares in Gabelli Utility Fund (GABUX), it's an interesting fund because of its managed distribution policy and the fact that it is run by famed investor Mario Gabelli. The fund's regular updates are different than most other industry mutual fund reports because they go into Gabelli's outlook in great detail. One of the ideas that jumped out of a recent shareholder report was a focus on the long-term positives facing nuclear power.
The Impact of Regulation
The manager noted the recent regulatory changes that have made it more difficult to own and operate coal fired utilities. He projects up to 50,000 megawatts of coal fired capacity to be taken off because of the new standards. While a material portion of this lost capacity will be made up with natural gas fired plants, Nuclear power will also find an important place because of its ability to provide relatively low cost, and low emission, power.
In support of his long-term expectation for nuclear power, Gabelli notes the Nuclear Regulatory Commission's move to allow Southern Company (NYSE: SO) and SCANA (NYSE: SCG) to build new nuclear plants earlier in 2012. This is the first time the agency has allowed a new nuclear plant in over 30 years. While the nuclear power plant meltdown in Japan has led some to, again, rage against the use of this energy source, the safety of newer plants vastly exceeds older nuclear plants. Moreover, as time passes, so, too, does the memory of that horrific disaster.
The U.S. Nuclear Giant
Gabelli believes the retirement of coal plants will increase the value of existing nuclear plants. This will be a huge benefit for companies like Exelon (NYSE: EXC). This utility is the largest nuclear power generator in the United States, with nearly 20,000 megawatts of power derived from that fuel source. Formed via a collection of mergers, most recently the purchase of Constellation Energy, the company is a large holding in Gabelli Utility Fund.
Now might be a good time for value investors to step in because a difficult power market has been a material drag on results of late. This situation could linger for a little while based on the historically low prices natural gas is fetching. The weak market, meanwhile, has led to relatively weak results and, consequently, a notable share price decline and questions about the sustainability of the utility's dividend. Those questions are reasonable, since the utility's shares have recently been yielding north of 7%. Still, for long-term investors willing to ride out a potential dividend cut that appears to be priced into the shares, the company's exposure to nuclear power could lead to long-term profits. More conservative investors may prefer to wait for the cut, though it is highly likely that the shares will rally on such news based on the current price action.
Southern and SCANA are also likely to be long-term beneficiaries, as their new plants are expected to come online over the next five to ten years. By that time, the manager expects power markets to be materially tighter than they are today as demand catches up to capacity. With low cost base power, these two companies will likely be in solid position to increase shareholder value.
Southern serves the Alabama, Georgia, Florida, and Mississippi markets with a largely coal-fired fleet of power plants. Introducing a new nuclear plant will be a clear benefit to the diversity of its power sources. A fairly conservative company, its construction projects (it is also working on a coal gasification plant) have run into some problems. That said, such issues are not uncommon with massive construction projects. Conservative investors should find a lot to like in these shares, which currently yield around 4.5%.
SCANA, meanwhile, serves the South Carolina market (it also has natural gas operations in Georgia, North Carolina, and South Carolina). This company's nuclear ambitions appear to be progressing smoothly. It is a financially strong utility with a strong dividend history. Conservative investors would do well to consider this company despite its shift toward a more growth-oriented business model. Its recent yield was around 4.3%.
Some Non-Utility Ideas
No discussion of nuclear power would be complete without a look at Cameco (NYSE: CCJ). The company is the largest publicly traded uranium miner in the world. If demand and or pricing for this core fuel source improve over time, Cameco and its shareholders will benefit. That said, uranium is a commodity, so the company's shares can be volatile at times. The stock currently yields around 2%.
A safer angle on the growth of nuclear power and usage would be Landauer (NYSE: LDR). The company is a global provider of radiation detection devices and services. Its a good company with a unique niche. Moreover, it not only provides radiation detection to the operators of nuclear plants, but it is involved in the medical field, which provides a notable avenue for long-term growth. As a small company, it has the potential to provide investors with years of company and dividend growth. Its shares recently yielded around 3.7%.
ReubenGBrewer has a position in Gabelli Utility Fund, but has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon and Southern Company. 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!