Which Utility Company Earns 5 Stars?

Grant is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The CAPS Stock Screener is one of my favorite tools, because adding the views of peers (CAPS Star Rating) can always be helpful.  Today we're going to look at some 5 Star Utilities, and come up with a winning investment.  Additional criteria on this preliminary screen included P/E (0-20), Dividend Yield (>3%), and Return on Equity (>10).  Here are the 5 star competitors.

Company Market Cap  P/E  Div. Yield % ROE 
Cleco Corp (NYSE: CNL)  $2.7B 15.5 3.1%  11.4
CPFL Energy SA  (NYSE: CPL)  $9.5B 12.4  6.6%  17.3 
EL Paso Electric (NYSE: EE)
 $1.3B 14.6  3.0%  11.0 
PPL Corp (NYSE: PPL)   $17.9B 11.7  4.7%  14.5 
South Jersey Industries (NYSE: SJI)   $1.7B 16.0  3.2%  14.8 

Investors flock to non-cyclical investments in unsure times, and that is definitely the case here, as all of the preceding stocks are within 5% of their 52-week high excluding CPFL.  Fortunately there are still some opportunities here, so let's take a look to see if these stocks deserve their 5 star rating.

Cleco Corp

Cleco Corp operates in two segments: Cleco Power, a regulated electric utility that serves approximately 279,000 customers in Louisiana, and Cleco Midstream, a competitive wholesale generation business.  They definitely have a reliable dividend; it has been paid out to investors since 1935, and their payout ratio is currently 45. Last year Cleco gave their future a big boost by signing a 10-year contract to supply power to Dixie Electric Membership Corp. The contract takes effect in early 2014, and analysts have predicted annual earnings growth will increase from 2% to 6% in upcoming years.  I definitely agree with the 5 star rating in this case.    

CPFL Energy SA

CPFL is an electric utility in Brazil that is at the opposite side of the spectrum in comparison to our other 5 star stocks, sitting right next to its 52-week low.  Earnings have not been great, as CPFL currently has a PEG of 4.00 and a payout ratio of 94.00--not pretty numbers.  Earnings have been hurt recently as CPFL widens their business with multiple acquisitions, and only time will tell if these additions pay off.  In a recent government auction with seven operating licenses up for grabs, CPFL only came away with one, building a substation in Sao Paulo.  The auction winner is decided by who is willing to take the lowest annual revenue from operations.  Though CPFL is at a beaten down price, I'm not sure they deserve 5 stars with their recent performance. 

El Paso Electric

El Paso provides electricity to customers in the southwest, though that is easy infer from the name.  In recent earnings El Paso discussed how lower electric rates and consumption hurt profits, but overall they were happy with the year.  The recent snow in Arizona might be helping them out now, but in all reality it was a down year for electric consumption in the southwest, and there was nothing management could do about it.  Analysts expect growth over the next three years, but with construction spending on the rise (expecting to spend $1.1 billion this year through 2017 on new power plants) and rates locked in until 2016, El Paso might not be the best option in the coming year.         

PPL Corp

The PPL family of companies includes seven operating utilities, delivering electricity and natural gas to more than 10 million customers in the U.S. and the U.K.  An immediate red flag here is PPL's dividend strategy.  Instead of lowering or keeping their dividend the same this past quarter, PPL decided to raise it 2% and take on long-term debt (negative cash-flow last year).  PPL did predict that 2013 will be a positive year, but to make that happen they need to get their balance sheet in order.  With their long-term debt to equity ratio at 1.74, some problems certainly exist.  PPL's biggest hope is their Supreme Court battle about overseas taxes qualifying for a foreign-tax credit.  Another stock that doesn't deserve 5 stars, in my opinion.  

South Jersey Industries 

South Jersey Industries acquires, markets, and distributes natural gas and electricity.  Analysts see earnings growing a hearty 9% annually over the next three years, and South Jersey's dividend looks as solid as ever.  Their recent proposition to implement an Accelerated Infrastructure Replacement Program has recently been approved, and with natural gas costs continuing to plummet this cost will be easily offset.  South Jersey has other energy-related projects such as thermal facilities and solar projects, but natural gas is their main endeavor.  The CAPS community got this one right--5 stars all the way.

Out of these five stocks, my favorite, and the one that to be added to my portfolio, is Cleco Corp.  They have a bright future ahead of them and a track record of success.  Feel free to comment below with any utility suggestions you might have!


TeenStockBoss has no position in any stocks mentioned. The Motley Fool recommends South Jersey Industries. 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!

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