Scalper1 News
Summary Utility stocks are getting beaten down, mostly due to fears of rising interest rates. However, I continue to favor well-run regulated utilities, which should be fine even if interest rates rise. This is because they can achieve favorable rate outcomes to ensure steady growth. Consolidated Edison offers the best mix of growth, an attractive valuation, and high yield. If I could only buy one utility stock, it would be ConEd. Utility stocks are getting sold indiscriminately right now, mostly because of the prospect of higher interest rates. Investors are fearing that once the Federal Reserve starts hiking interest rates, utility stocks will suffer from rising costs of capital. I believe this fear is overblown, especially as it pertains to the regulated utilities. Regulated utilities should be fine, even with higher rates, because they are able to pass through regular rate increases to cover their higher costs. Rather than getting overly panicked about interest rates, it’s more important to assess the health of an underlying business, which I believe is a truer indicator of whether a stock will perform well long term. Utilities are selling off now, but the downside risk is limited, because their underlying businesses are vitally important to society. People always need to keep the lights on. Electricity is basically a matter of national security, which makes it hard for me to believe the best utility stocks will suffer greatly, even if interest rates rise from here. As a result, I believe income investors can use the recent dip in utility stock prices as a buying opportunity. Valuations look attractive, and dividend yields are elevated, thanks to the falling stock prices. My favorite in the entire utility sector is a regulated utility with a strong business, attractive valuation, high dividend, and a long history of dividend growth: Consolidated Edison (NYSE: ED ). The Best Mix Of Growth And Yield Consolidated Edison has increased its dividend for 41 years in a row, which is very impressive. At its recent closing price, the stock yields 4.5%, which is also impressive. This is a higher yield than many other popular utility stocks, including American Electric Power (NYSE: AEP ), which yields 3.9%, or Exelon Corporation (NYSE: EXC ), which yields 3.6%. This gives ConEd an edge for income investors. Admittedly, ConEd doesn’t match Southern Company (NYSE: SO ), which yields 5%, but I believe investors should avoid Southern Company for fundamental reasons. Southern Company is struggling, because of problems at its massive Kemper project. Kemper is a massive lignite coal facility, which is amounting to a money pit for the company. Last year, Southern took $536 million in after-tax charges related to increased costs at Kemper. The year before that, the extra costs totaled $729 million. The total price tag for Kemper is projected to reach $5 billion, which is significantly higher than the $2 billion initially anticipated. Continued cost overruns are weighing on Southern, which posted a 15% decline in earnings per share last quarter . Meanwhile, ConEd is displaying the slow-and-steady growth that is more typically associated with utilities. ConEd’s earnings per share grew 2% last quarter , thanks to higher rates, as well as lower operating and maintenance expenses. Looking back further, ConEd grew EPS by 3% last year . These aren’t huge growth rates of course, but utilities aren’t relied upon for growth. ConEd’s growth is more than enough to continue paying its dividend, as well as providing modest dividend increases each year. Plus, ConEd expects 2015 to be another successful year. The company raised full-year guidance after its first-quarter earnings report. ConEd expects to earn $3.97 per share at the midpoint of its forecast, which would represent 6.5% growth from 2014. This is a very strong growth rate for a utility. Moreover, even when interest rates do begin to rise, ConEd will be able to navigate the rising-rate environment because it has a manageable level of debt. According to ConEd’s 10-K , ConEd’s interest payments total $662 million this year, $1 billion over the following two years, and then just $878 million the two years after that. ConEd’s interest payments over the next four years are manageable, given the company’s steady profitability. Last year, alone, ConEd earned $1.1 billion in net income. Its profits are more than enough to meet its debt obligations as well as continue to reward shareholders with earnings and dividends. Lastly, ConEd is my favorite utility because I believe it is attractively valued in relation to its peer group, especially considering its growth is higher than many of its competitors. ConEd trades for 15 times earnings. That is on par with AEP, and is a lower valuation than both Southern Company and Duke Energy (NYSE: DUK ), which each trade for 18 times EPS. The “Goldilocks” Utility Stock It seems that not all utility stocks are created equal. While some like Southern Company and Duke Energy appear slightly overvalued, ConEd trades for a discounted P/E. Meanwhile, ConEd’s dividend yield is higher than certain utility stocks, such as AEP and Exelon. For these reasons, I believe ConEd is the Goldilocks utility stock. Its valuation, underlying growth, and dividend yield are just right. That’s why if I were could only buy one utility stock right now, it would be ConEd. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News