Use access key #2 to skip to page content.

SockMarket (34.21)

A Utilitarian Blog: Utility Sector Review, Performance, & 3 Recommendations

Recs

5

May 21, 2010 – Comments (7)

Sector Update

It has been a while since I penned anything on the sector that I know and love (well, as much as you can love any boring sector). A couple months back when someone asked me what undervalued stocks I saw in the area I responded that there really weren't any cheap companies, at the time.

As is the case at the start of most bear markets, utilities have initially followed the market downwards (people will sell indiscriminantly in the face of large market drops) and we are starting to see signs of value creep back into the sector.

I expect that if the market continues to decline utilities will drop as well, although not as much as the market, however if the market were to rise (slowly) utilities would probably follow in lock step. If we see a straight shot rise, ie more days like today, utilities will underperform the market but will likely rise as well.

I don't have concrete reasons for believing this, but my logic is as follows:

When the market falls, people will look for high yielding, safe investments. Which naturally means they will head to highly rated bonds and utilities. If the market is making terific upward progress people will see the tiny, volitile stocks going through the roof and want a piece of the action--so they will take their funds over there. If the market goes up slowly then there is a fair amount of rationality present in the marketplace and all values will be honored equally.

 

My Preformance Update

Back on Febuary 18th I liked:

Stock    Price at Prediction    Current Price      % Change

PGN          $38               $38.5                  +1.5%

ED*          $42.5            $43.5                  +2%

SO*           $32               $33.5                 +5%

EXC**       $45               $39.5                 -12% 

I called the following bad investments, their returns since that time are as follows:

Stock    Price at Prediction    Current Price      % Change

AEE         $25.5                   $24                  -6%

DUK        $16.5                    $16                 -3%

FE**        $40                      $35                 -12.5%

 

* I liked ED and SO but said that no one was getting a deal at current prices, take it as you may

** both stocks discussed on Apr 6, as oppose to Feb 18 for the others.

 

Stocks to Watch

Exelon (EXC)

I liked it at $45 and love it at $39.5. The issue in NJ is resolved, the potential rise in uranium prices from the stop in USSR uranium is still 3 years off, and the yield is now nearly 6% (on a payout ratio of only 51% so there is room for growth). Here is what I like about them:

1) Nuclear power, 92% of their electricity production, will likely see costs stay relativly flat, compared to coal fired power plants, which should see an increase in costs due to an increase in coal price.

2) Natural gas, their other major raw material cost, is hedged.

3) They have over $5B in cash and cash eq.

4) They are reducing debt, to the tune of about $500M a year.

5) EPS, as always is quite strong, and has been grown well over the last decade

6) even based on last quarter's unusually low earnings figure P/E is still under 13

7) The yield, which is usually my biggest factor in making a decision, is 4.7%, with a payout ratio of about 50%.

8) ROE is 22%

9) Op. margin is almost 30% and profit margin is nearly 16%. Those are exceptional figures for the industry.

10) ROI is pretty good, I don't have any numbers but looking at a 20 year chart should tell you all you need to know about this.

Why is it so low? Either there is some big news that the market doesn't know about or it is simply being mispriced. I would not be surprised to see a return of prices to $50 or thereabouts. 

 

Florida Power & Light (FPL)

Wind is nice, the costs of producing electricity won't rise much, unless nature starts billing them to send the wind. But there are reasons beyond that why I am willing to buy it (be warned yield, which is what I usually base my investments on, plays no part in my decision). Reasons:

1) Long term ROI is exceptional

2) ROE is 15%. This isn't tremendous, but it is decent

3) P/E is 11

4) Price/book is 1.6. Again not great but pretty good. 

5) EPS has gone up nicely, in a stairstep pattern, since 2000 (up about 100%, or 10% a year

6) Payout ratio is only 43% so there is plenty of room to raise the dividend, if they choose to

I generally won't buy any utilitiy with a yield under 5% but FPL may be a good exception. This appears to be a great company, with costs that cannot get out of control and a stable or growing demand for their product. The stock is down from the levels ($65) which may have been a little overpriced, but I would not be stunned to see a return to the high 50's with 4-5% growth every year, to go with the 4% dividend it currently sports.

I would recommend holding off on this until it shows some sort of solid bottom, but it is probably a good buy here if you don't want to wait.

 

Progress Energy (PGN)

They are a pretty solid company, and the 6.5% yield is pretty darn good. What I like:

1) EPS is up, a little, over the last decade. I would like to see more growth, but with a 6% yield I am not too worried

2) Price/Book is 1.1

3) Long term ROI is decent, despite a recent decline in price

4) Payout ratio is 91%. Not great but with a dividend like this and solid, safe earnings, it means that treasured payout is safe

 

This isn't a tremendous buy, I only want it because of the dividend. You won't get great capital gains but 6.5% year in and year out isn't bad. It is a nice addition to the safe, high yield section of your portfolio.

EXC, FPL, and PGN are the only stocks I am willing to call a buy on at this point. There are some others I am closely watching and am tempted by some others but each have fatal flaw, so to speak. Here they are:

American Electric Power (AEP) - They have a decent dividend (5.4%) and good payout ratio (58%), and earnings have been increasing decently over the past decade. The kicker here is a terrible ROI. The stock has only had one run up and has otherwise been flat over the past 40 years (up from $24 to $31, or about $0.17 a year). I want something that accumulates value, not just sustains it.

Cons Edison (ED) - I always like them so I am just going to copy my Feb 18th description of them: They control gas and electric assets in NYC and the surrounding area. Rock solid and a great dividend payer. It has been raising dividends annually since some time in the 1970’s (I believe) and I see no reason for anything to change here. Excellent company. Buy anywhere over 5.5% yield. Over 6% is a damn good deal.

Southern Company (SO) - Same goes for SO as ED. Again my Feb description: Rock ribbed stock, if I ever saw one. Probably safer than most bonds. I like their preferred stocks more than the common though, as their yield is better. There are about a dozen, which go under the names of: Georgia Power, Gulf Power, Alabama Power, and Mississippi Power. Most yield 6% and are redeemed at $25. GAT trades closer to $29.5 and has a higher yield, I don’t remember what it is because it took 6 or 7 years to pay for itself it you held it to maturity (so I was not interested).

In any case the common is generally a good buy for the ultra-conservative investor when the yield is north of 5%. Be warned you will usually get less than 1% capital appreciation compared to the usual 2-3% you can get on other utilities.

 

That's it for this edition.

 

Dan


7 Comments – Post Your Own

#1) On May 21, 2010 at 9:30 PM, goalie37 (86.59) wrote:

EXC looks like something for further research.  Thanks.

Report this comment
#2) On May 22, 2010 at 4:21 AM, memoandstitch (< 20) wrote:

Can you post a link to the news about resolved NJ issue?

Report this comment
#3) On May 22, 2010 at 3:29 PM, SockMarket (34.21) wrote:

golie,

your welcome. I am glad I could put something useful up.

memo,

I read it a couple weeks back in an article that was focusing on FPL; it was a small side note. And since the body was not very interesting to me I don't remember what it was about or have any clue as to what the title would be. 

I can, however, tell you that the plan is to force EXC to install a circular cooling system (at least that is what I call the internal light-water cooling) and stop the flow through system. 

Report this comment
#4) On May 24, 2010 at 3:15 AM, djshagggyd (< 20) wrote:

Daniel-

Great post as always! Two questions...

First, my girlfriend owns a fairly significant amount of AEE. She's had it ever since she was born, and it's the only stock she owns.

I've been advising her to come up with a diversification strategy. Especially because I agree with you that AEE is not a very good company. So right now, we are trying to come up with an exit strategy. Do you have any thoughts about what might be a good time or price to exit at? I was planning to use a DCA method over several months to minimize potential mistakes. Do you think that would be a good idea?

My second question is: how do you feel about Linn Energy (LINE)? In my (newbie) opinion they seem to be a really solid company with good fundamentals. Would you agree?

Would love to hear your thoughts! Hope you have a great week!

~djshagggyd

p.s.-I posted my first colorful, fancy, chartastic blog thanks to you! 

Report this comment
#5) On May 24, 2010 at 11:45 AM, SockMarket (34.21) wrote:

djsh,

Your blog looks great (better than borat). btw I will try and put you in the next issue of the clown list. I forgot to put that on your blog.

anyway, I would tend to agree that getting out is a good move. In terms of DCAing out I would suggest this:

after each dividend payment the stock seems to fall for a couple days but recover 6-12 days later. I would suggest selling 6-12 days after each payment, that way you get a little more money out of it.

 

As for LINE: I don't know as much about energy, however I would say that since they have been public they have had a very hard time turning a profit and have been pretty shaky. I am ultra-conservative so I get scared off pretty quickly by that sort of thing. I am not sure if your GF has your risk tolerance but if so this may be fine. As I see it as long as they can keep up their dividend with a reasonable payout ratio they will be a fine investment. If they stop it for whatever reason they will likely go to about book value.

If you want an income for her you may want to look at some MLP's. I like: BWP, APU, & SPH, although all are a bit high right now. And if you want a roller coaster: BP :). 

Report this comment
#6) On May 24, 2010 at 1:28 PM, djshagggyd (< 20) wrote:

Daniel-

Thanks so much for the response and the advice! Really appreciate it! I like your suggested strategy for DCAing with AEE... sounds like a really good idea! ...and I never would have thought to do it like that on my own!

Also, thanks for the thoughts and link on LINE! I agree that I'll have to keep a close eye on them... specifically their profitability and the stability of their dividend. 

Hope you're havin a good Monday! 

~djshagggyd 

Report this comment
#7) On May 24, 2010 at 9:04 PM, SockMarket (34.21) wrote:

your very welcome. im glad I could help.

Report this comment

Featured Broker Partners