A recent story about Duke Energy Corp (NYSE:DUK) indicates just how much of a factor random chance can play in investing. Sure, that’s true for all investing, but for utilities investing it’s more obvious than in other sectors. In its recent earnings call, Duke said that its first quarter profit was up because the weather was cool, extending the heating season.
Given that I’m relatively certain Duke Energy Corp (NYSE:DUK)’s management team can’t control the weather, this is a perfect example of how dependent utilities can be on luck. What would have happened over the winter if temperatures had been mild? Nothing good for Duke – or other utilities. And a year in which moderate temperatures hit both winter and summer (though never here in South Carolina, trust me) could undercut profits and the value of your investments.
Still, utilities can be a good investment for the right people. Given that they have a captive audience – the vast majority of people want to have electricity, after all – utilities can be good for some investors less focused on growth.
Income, income, it’s our friend
Duke Energy Corp (NYSE:DUK)
| 12-Month Gain | P/E | EPS | Dividend Yield | Net Margin |
| 15.14% | 22.49 | 3.31 | 4.11% | 8.90% |
Duke has just barely kept pace with the S&P over the last year. I can understand investors’ concerns over this. If you go further back, over a five-year period it beat the S&P and over 10 years it was beaten. Still, growth isn’t everything for huge, highly regulated firms. Income should also be a major factor.
And Duke Energy Corp (NYSE:DUK) has income–it’s currently paying a very good 4.11% dividend. So while you can pretty much count on it growing about as fast as the market, you’re also getting one of the best yields out there. It’s grown quite a bit over the last year, as the company has tried to put the merger with Progress Energy behind it so it’s unknown if that level will continue, but it’s much easier to justify raising yield than dropping it. Duke Energy Corp (NYSE:DUK) should be a good investment for income investors for the foreseeable future.
The Southern Company (NYSE:SO)
| 12-Month Gain | P/E | EPS | Dividend Yield | Net Margin |
| 4.19% | 20.14 | 2.35 | 4.30% | 14.60% |
Another big utility in the low-growth high-dividend space is The Southern Company (NYSE:SO). If anything, The Southern Company (NYSE:SO) is a more reliable high-yield investment than Duke Energy Corp (NYSE:DUK). It’s paid a dividend consistently above 4% for more than 5 years (except for one small dip to just below 4% in 2012).
Despite that, it hasn’t kept up with the S&P this year. You’ll find that to be a trend with some utilities; they’ll have some years when they underperform and some when they overperform, but the dividend stays right up there. Again, for the five-year mark it’s over and for the 10-year mark it’s under. Try not to get too worked up about it and enjoy the income stream from the dividend.
But growth CAN happen
Dominion Resources, Inc. (NYSE:D)
| 12-Month Gain | P/E | EPS | Dividend Yield | Net Margin |
| 17.16% | 106.55 | 0.57 | 3.69% | 2.68% |
The above isn’t to say that you can’t make a solid gain in utilities. It’s just that waiting for gains in utilities can make you a bit nervous.
Dominion Resources, Inc. (NYSE:D) is in solid growth mode in anticipation of its natural gas holdings and capacity paying off big time as the U.S. undergoes the fracking revolution. That’s led to an investment where the growth keeps up with the S&P over the last year and there’s a solid 3.69% dividend. It’s hard to knock that until you dig a bit deeper. Dominion Resources, Inc. (NYSE:D) is sitting on a P/E of 106.55–that’s far enough out of line for a utility to tell us that it’s been overbought – especially given a weak net margin for 2012 – that the value may be factored in already. Stick with investing in Dominion Resources, Inc. (NYSE:D) for the dividend. It would be unwise to count on runaway growth at this point.
American Electric Power Company, Inc. (NYSE:AEP)
| 12-Month Gain | P/E | EPS | Dividend Yield | Net Margin |
| 32.39% | 20.11 | 2.54 | 3.84% | 8.15% |
Sometimes, though, one can find a utility that does look like it can deliver both growth and income. In its 12-month, 5-year and 10-year performance, American Electric Power Company, Inc. (NYSE:AEP) has never been less than -1% on the S&P and most likely outperforms by quite a bit. The company is well-poised to take advantage of the natural gas revolution, but it’s not yet overvalued as it’s P/E is staying in the reasonable 20.11 level.
The dividend income is there for American Electric Power Company, Inc. (NYSE:AEP), too. While it’s been higher, even with the recent erosion of yield brought about by share gains, it’s still right below returning 4%. For income investors hoping to take money out of their stocks, American Electric Power Company, Inc. (NYSE:AEP) is a good choice that combines both income and a steady chance to outgrow the market as a whole.
Making the market
Utilities are affected by nature, as there is always the potential for demand to be affected by weather. Moreover, in an industry as highly regulated as electric utilities, profit isn’t guaranteed. There is, however, a good track record of companies being able to convince their state regulators that prices need to go up when costs do. That means there’s a limited profit upside, generally, but also a limited downside. That’s why you should be looking at utilities as income opportunities and not as growth plays.
The article Duke Energy and Random-Chance Utility Investing originally appeared on Fool.com.
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