Hurricane Sandy and the Real Dividend Stocks of New Jersey
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've been to plenty of beaches, but for some reason the Jersey Shore has always been part of me. That's why it saddens me to see the havoc Hurricane Sandy wreaked on the region. The submerged houses and automobiles, the breached seawalls, and, above all, the lost memories are painful. Aggravating the situation, much of the coast remains off-limits, and thousands are without power.
As one of the lucky few with power, I got to thinking about the situation, the worst I've ever seen in the region. And I realized how little I knew about the local electric utilites.
Fellow Fools, today I present to you the real dividend stocks of New Jersey. Or, to be more precise, the dividend-paying parents of New Jersey's electric companies. We'll travel from Cape May in the south to the New York megalopolis in the north, taking the Garden State Parkway and then the New Jersey Turnpike in our journey.
Stable, regulated, and afterthoughts in many people's minds, these stocks don't bring much drama to your portfolio. They do, however, pay dividends that are downright generous in today's day and age. But are they worth your time?
Let's start at the southern terminus of the Parkway, where there are traffic lights and bucolic landscapes abound. Along this stretch of road lie some of the worst hit regions: Atlantic and Cape May Counties, both of which are served by Atlantic City Electric, a division of Pepco Holdings (NYSE: POM). This company has a lot of cleaning up to do, in both the physical sense and the fiscal sense. Ten percent of the float is being short sold. That's a lot, especially considering that the other utilities we'll discuss have minimal short interest (below 2% of the float).
Evidently, a sizable minority of investors lack faith in POM. Here's why: 1. the dividend payout ratio is 107%, a sign that the yield may not be sustainable, 2. the trailing P/E is 20, high for a utility, and 3. the company has only $39 million in cash, but $5.5 billion in debt. I'll admit that at three percent above book value, it looks reasonably priced, but I don't see the upside here. Time to keep traveling.
About two hours later, we exit the Parkway onto the Turnpike. We are out of the Pine Barrens and in the suburbs of Central Jersey, which are served by Cranford-based Public Service Enterprise Group (NYSE: PEG), better known as PSE&G. Among the best in its class, this company enjoys a stellar reputation as one of America's five most respected electric and gas utilities. Trading at a trailing P/E of 12 and at 1.5 times book value, it sports an attractive valuation as well. The balance sheet shows almost $0.10 in cash for every dollar of debt, and the 4.5% yield makes for a 53% payout ratio. Investors might be in line for a dividend increase.
The downside? Underfunded pensions to the tune of $1.8 billion and an aging nuclear plant in Salem County.
The traffic's starting to build up, so we decide to make our next stop our last. We end in Hudson County, the turf of Jersey Central Power & Light (JCP&L), a unit of Ohio-based FirstEnergy Corp. (NYSE: FE). Just across the Hudson River from Manhattan, the gateway to the Holland and Lincoln Tunnels, JCP&L is still reeling from Sandy's aftermath. Restoring power to this densely packed county is a herculean task.
We delve into the books and we don't like what we see. FirstEnergy has only $94 million in cash reserves and $18.6 billion in debt, high even by industry standards. It's also operating with the second highest dividend payout ratio (81%) of the cohort. The data show declining year-on-year revenue and profit, meaning that the 4.8% yield is about all the company can afford to pay investors.
In today's yield-starved environment, the yields of these dividend stocks are incredibly tempting. They are about 100-200 basis points (1-2%) below junk bond yields, yet come with less risk. Not a bad deal from this perspective.
This group of stocks is fully valued, with Public Service Enterprise Group/PEG the "best" - or least bad, depending on how you see it - buy of the bunch.
The Bottom Line
If you initiate positions in these utilities, do so expecting zero or minimal appreciation. Dividends will account for the bulk of your returns. Also, invest with a long time horizon. Think of it like buying and holding a carefully selected bond until maturity; the price may fluctuate over the years, but barring a major catastrophe, your carefully selected investment should be profitable.
Nevertheless, there are no true widows and orphans stocks anymore. It's unwise to entrust too much of your nest egg in any individual company, no matter what the business or the management team or the past performance. And this is coming from someone who strongly opposes mindless overdiversification and believes in the power of a focused portfolio.
I'll be following the real dividend stocks for many more seasons. Stay tuned for the reunion.
whywalkrandomly has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.