Xcel Energy Inc (NYSE:XEL) represents a second quintessential example of a consistent but slow-growing blue-chip utility stock. Moreover, we again see that dividends have closely tracked earnings growth except that they, like we saw with The Southern Company (NYSE:SO), have risen even more steadily and consistently. A focus on the company’s earnings (the orange line) and the dividends (the pink line) once again present what I contend to be very “bond like” characteristics. Furthermore, I believe the earnings and dividend lines also paint a picture of safety. Once again, even the black monthly closing stock price line presents less volatility than you would find with most companies in other sectors.
Since Xcel Energy Inc (NYSE:XEL) starts out slightly below fair value (price below the orange line), and ends at approximately fair value, it is readily apparent that price performance would slightly exceed operating earnings growth. The capital appreciation component of 5.3% per annum is modestly greater than the company’s operating earnings growth rate of 3.9%. Moreover, the above-average dividend yield offered by this utility when it’s at fair value also creates S&P 500 beating total returns.
But most importantly, with this example we see the benefit that can be gained by investing in a quality utility when your entry price represents undervaluation. Not only does this mitigate risk even beyond the safety that utility stocks naturally offer, it simultaneously expands all returns, total dividends and capital appreciation.
Net and Gross Profit Margin: Xcel Energy Inc and Southern Co
By their very nature, utility stocks tend to be capital-intensive businesses that often carry high debt loads as a result. However, the gross and net profit margins of many utility stocks are surprisingly strong. Apparently, even though these companies are regulated, which limits growth, their margins are reasonably high. The following FUN Graphs depict the gross and net profit margins for Xcel Energy Inc (NYSE:XEL) and The Southern Company (NYSE:SO).
Beta : Low Volatility Low Risk
To be perfectly candid, as a fundamental investor I tend to eschew any metric that deals solely with price or price movement. Nevertheless, since this article has dealt extensively with discussions about risk, and since many consider beta a measurement of risk, I swallow my pride and include the rolling 5-year betas on my featured companies – Xcel Energy Inc (NYSE:XEL) and Southern Co.
For those who do consider price volatility as a form of risk, then the low betas on both of my sample companies would indicate low risk. Certainly this provides clear evidence that price volatility with low growth blue-chip utility stocks is very low. Consequently, investing in utility stocks might spare investor angst in today’s highly volatile stock markets.
Summary and Conclusions
In today’s low interest rate environment investors are hungry, and some even desperate to find investments that provide both yield and safety. Admittedly, and during normal times, I might stop short of calling any equity in any sector bond alternatives. However, these are not normal times. Therefore, as long as rates currently remain at excessively low levels, then I believe that select utility stocks trading at fair or low valuations could be given consideration in lieu of traditional fixed income investments.
