MGE Energy, Inc. (MGEE): Are Small Utilities Now Targets for Bolt-on Acquisitions?

Berkshire’s strategy

Berkshire Hathaway Inc. (NYSE:BRK.B)’s core business of insurance provides the Oracle of Omaha a huge amount of capital to allocate. Over the past few years, though, the company has also been increasing its earnings so that Buffett must now decide what to do with over $1.2 billion each month.

Buffett has been purchasing capital intensive businesses with large barriers to entry, or as he refers to them, “moats.” These companies include the railroad company Burlington Northern and most recently NV Energy. These capital intensive companies will continue to generate large amounts of income, with a low risk of competition from new entrants. This will solidify Berkshire as a cash flow machine for years to come, even after Buffett eventually leaves the helm.

Foolish bottom line

MGE Energy, Inc. (NASDAQ:MGEE) has been increasing its dividend for the last 37 years and only has a payout ratio of 56%, below the 65% industry average. Sitting at $1.25 billion in market cap, this company is small enough to be a potential takeover target by a larger utility company looking to expand its footprint into a stable market. Until then, Madison Gas & Electric Company can provide stable investors a safe place to park their money and sleep at night.

The article Are Small Utilities Now Targets for Bolt-on Acquisitions? originally appeared on Fool.com and is written by Wes Patoka.

Wes Patoka owns shares of Berkshire Hathaway and Madison Gas & Electric Company. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.