Blue-chip Utility Selections Fairly Valued
The following portfolio review lists eight high quality utility companies that I feel are fairly valued today and worthy of consideration for investment into a dividend income portfolio. Note that they can all be purchased at a P/E of 15 (or very close to it) or less.
Quintessential Utility Stock Examples: Southern Company and Xcel Energy Inc
Since a picture is worth 1000 words, the following earnings and price correlated graphs and performance tables on my two featured utility examples illustrate what this article has been discussing about the performance and safety characteristics of utility stocks. (Note that in both the examples below the orange earnings justified valuation line represents a P/E ratio of 15 everywhere across the entire graph.)
The Southern Company (NYSE:SO)
“The Southern Company, together with its subsidiaries, operates as a public electric utility company. The company is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. It constructs, acquires, owns, and manages generation assets. As of December 31, 2012, the company owned and/or operated 33 hydroelectric generating stations, 32 fossil fuel generating stations, 3 nuclear generating stations, 13 combined cycle/cogeneration stations, 4 solar facilities, 1 landfill gas facility, and 1 biomass facility. The company also provides digital wireless communications services with various communication options, including push to talk, cellular service, text messaging, wireless Internet access, and wireless data; and wholesale fiber optic solutions to telecommunication providers in the Southeast under the Southern Telecom brand name. The company was founded in 1945 and is headquartered in Atlanta, Georgia.” Description courtesy Capital IQ
The Southern Company (NYSE:SO) represents a quintessential example of a consistent but slow-growing blue-chip utility stock. Moreover, we see that dividends have closely tracked earnings growth except that they have risen even more steadily and consistently. A focus on the company’s earnings (the orange line) and the dividends (the pink line) present what I contend to be very “bond like” characteristics. Furthermore, I believe the earnings and dividend lines also paint a picture of safety. Even the black monthly closing stock price line presents less volatility than you would find with most companies in other sectors.
Since The Southern Company (NYSE:SO) starts out at fair value (price touches the orange line), and approximately ends there, it is readily apparent that price performance would correlate very closely with earnings. The capital appreciation component of 3.5% per annum, is almost identical to the company’s operating earnings growth rate of 3.4%. Moreover, the above-average dividend yield offered by this utility when it’s at fair value creates S&P 500 beating total returns.
Xcel Energy Inc (NYSE:XEL)
“Xcel Energy Inc., through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electricity in the United States. It operates through Regulated Electric Utility, Regulated Natural Gas Utility, and All Other segments. The company generates electricity using coal, nuclear, natural gas, hydro, solar, biomass, oil, and wind energy sources. It is also involved in the purchase, transportation, distribution, and sale of natural gas. In addition, the company engages in developing and leasing natural gas pipelines, and storage and compression facilities; and investing in rental housing projects. It serves residential, commercial, and industrial customers, as well as public authorities in the portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin. Xcel Energy Inc. was founded in 1909 and is based in Minneapolis, Minnesota.” Description courtesy of Capital IQ
