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Avista Is An Excellent Stock For The Defensive Portfolio

Avista Corp. pays a very consistent dividend with a current yield of 3.96%. It also has very stable customer base that provides protection in any bear market. AVA is trading at a reasonable price with a forward p/e of 16. The company grew revenue by 8% YoY for the most recent quarter. While there’s nothing sexy about owning a small utility company operating in the northwest region with a market cap of only $2 billion, Avista Corp. (NYSE: AVA ) is a great dividend paying stock for the defensive investor looking to preserve capital during a bear market while collecting a 4% yield. AVA has consistently raised its dividend over time, even during the depths of the financial crisis. One of the great things about companies offering services that everyone needs is that they usually outperform the market during recessions. By protecting capital while most of the market is losing it, you have a larger base from which to grow when the market eventually turns positive. This is exactly what Warren Buffett’s portfolio did during the great bull market of the 1990s that eventually went bust. Everyone thought Buffett was crazy for staying out of tech stocks during the now famous record breaking run the sector was having for those few years. While everyone was saying “this time is different,” Buffett knew that a market with an average p/e over 50 could not sustain that level of growth and that it would not end well. Of course he was correct, and many companies not only lost most of their value when the bubble popped, but a great number of high flying growth companies simply went out of business. Buffett’s portfolio on the other hand just kept chugging along, building wealth. How did AVA do doing this period? In October, 1999 AVA was trading at $18 a share. After the bubble burst and many were losing their shirts and swearing off stocks forever, AVA was trading even higher than its pre-crash price of $18 a share. In October 2000 after the market crashed, AVA was trading at $22 a share. This example clearly illustrates the power of investing in stable dividend paying stocks during bear markets, but in terms of psychology, which of course is a large part of investing, I would argue that it also makes the case for owning this type of stock during all kinds of market conditions. AVA has solid fundamentals. At a p/e of only 16 and YoY quarterly revenue growth of 8%, the company can not be said to be overpriced. Dollar cost averaging into this company would be a logical strategy because with such a stable p/e ratio, you can buy it at almost any time and know that your capital will be safe and growing over the long term. AVA is currently trading at only 1.4 times book value. This means that the company’s shares are only trading at a slight premium to the value of the company’s tangible assets. So in the event of a severe market crash, the company could literally sell off its assets and pay shareholders back. This is highly unlikely to happen, of course, since a utility company as strong as AVA will most likely perform very well in a severe bear market, which history has shown to be the case for this type of stock. Again, notice how well AVA performed during the huge crash of 2000 when the internet bubble burst. AVA was no worse for wear after the crash, and in fact, was trading at a higher price while most of the rest of the market took years to recover. One of the greatest factors that AVA has going for it is that, like many utility companies, it basically has a monopoly in its region. This translates to a huge moat, as the barriers to entry into this market are basically insurmountable. It would cost billions of dollars to attempt to supplant this market leader in the region where it operates (the northwest), and for that reason it simply isn’t worth the attempt for another utility provider. So AVA has stable earnings, a very strong moat, a high dividend, and is trading close to book value. These factors include most of what any value investor is usually looking for in a conservative investment. This strategy has the benefit of letting us sleep well at night, knowing that no matter what happens, our capital will be safe and we will at least be earning some income from the dividend while we wait for better market conditions to prevail. We accept the fact that we will not build as much wealth as others during bull markets, knowing that we are still accomplishing our long-term investing goals while not losing years of our lives being stressed out about when the next recession will hit. It’s a simpler strategy too. When you invest in stable dividend paying companies that offer products and services that investors need, you don’t have to worry about timing the market or looking at a million charts and using complicated technical analysis to try to predict the future. You just invest money when you have it in your defensive portfolio and let the power of compounding do its work. In the meantime, you can enjoy your life and let others’ hair turn gray trying to time the market (and usually failing). In conclusion, AVA is a great addition to the defensive investor’s portfolio due to its history of stable dividend growth and solid earnings. There may be companies in other industries that pay a higher yield than 4%, but you won’t find an industry or company that is more defensive than a utility company that is the market leader in its region. AVA will be raising its dividend and slowly growing for the next 50 years. If you have a long time horizon, you could do a lot worse.

Avista Corporation: This Utility Is A Buy

Summary Power generation mix is nearly all clean energy. Dividend history is solid, management guidance for 4-6% growth going forward. Only moderate leverage; Avista hasn’t been on a borrowing spree like most utilities. Shares are just simply one of the top picks in the utility sector. Set it and forget it. Avista Corporation (NYSE: AVA ) primarily operates as a regulated utility business, with the majority of revenue derived from providing electric and natural gas services to customers in Washington, Idaho, and Oregon. While the company does serve some customers in Montana and Alaska (via the AERC acquisition), these operations, along with the non-utility businesses, are fairly immaterial to company earnings. Despite favorable generation capacity, healthy dividend growth, and favorable rate case filings, shares have largely tracked broader utility sector results. Are shares poised to outperform in the future? Favorable Power Generation Bucking the trend of utilities that are woefully behind the curve in emissions standards, Avista’s 1,800MW of generation capacity currently consists of 56% renewables and 35% clean burning natural gas. It isn’t a surprise that the company consistently wins awards for being one of the greenest power producers in the United States. This is a big positive for shareholders. My attraction to Avista and companies with such strong renewables mixes is not born out of liberal thinking but a mere acknowledgement that it is extremely unlikely that current federal and state regulations regarding emissions standards get dialed back. The company’s power generation portfolio simply makes regulatory overhang due to increased renewable standards from state regulators and the federal government a non-issue. If I’m an investor looking for steady income, I don’t want to see surprise jumps in capital expenditures to bring plants into compliance or bad press from dirty power generation [think PLM Resources’ San Juan Generating Station (NYSEMKT: PLM ) or Duke Energy’s (NYSE: DUK ) coal ash basin spills]. Fact is Avista’s power generation mix greatly exceeds even the strictest of mandates, including those set for implementation in 2035 or later. This should help investors sleep easier at night. Operational Results (click to enlarge) Utility revenue has been moving up slowly, primarily based on growth in residential and commercial consumers, while revenue from industrial customers has been weakening since the expiration and subsequent renewal at lower rates of some large customer contracts recently. Revenue can be volatile. This is because Avista often chooses to sell its excess natural gas when current wholesale market prices are below the cost of power generation using its natural gas plants. Years that see these sales generally see higher revenue (due to these sales) but lower profit and operating margins. Investors can use 2014 versus 2013 as an example. In 2014, Avista sold $43M less natural gas in the open market ($84M in sales versus $127M in 2013). So while revenue only expanded marginally (2.2%), operating income grew 10% due in part to better margins. Additionally, shrinking operations and maintenance costs in spite of growing revenues is also a compelling sign to me that management is keeping a close eye on costs. With incremental revenue gains being hard-fought in the utility sector, any expense reductions that yield operational efficiency gains should be lauded. Money In, Money Out (click to enlarge) Like I do with all utility analysis, I look to make sure that cash being spent does not greatly outweigh cash being generated from operations. Utilities in general have been on a spending spree in the past few years due to looming regulatory burdens and record low interest rates. Debt issuance has been both necessary and coincidentally quite cheap, leading utility management to feat on the smorgasbord of easy money. Avista’s overspending and subsequent debt issuance has been relatively mild in comparison, especially considering that the company raised $245M in cash from the sale of the Ecova business in 2014, with the majority of those proceeds used to offset common stock dilution. Total long-term debt raised between 2011 to the current period has been just $250M. Because of this, Avista’s net debt/EBITDA stands at 3.3x, making it one of the least leveraged utilities I’ve analyzed recently. Operational cash flow should grow during 2015-2017 through rate recovery increases while capital expenditures flatten in the $350M range. This should decrease the deficit we see in the cash flow analysis. Overall, I don’t see an alarming trend here that should worry investors. Conclusion With a current dividend yield of approximately 4%, shares are trading slightly higher than historical averages by approximately 5%. While many investors would elect to wait it out for shares to drop, in the grand scheme of things an investment strategy like that can make you miss out on some valuable opportunities. Establishing a half position and electing to buy on dips might be the better strategy. In my opinion, Avista’s diversified utility business is one of the safest available options in the publicly-traded utility sector. Shares, however, don’t seem to carry any real premium for this value. While I don’t own shares (I instead own shares in Calpine Corporation (NYSE: CPN ) and AES Corporation (NYSE: AES ) given my heavier risk appetite than most), I certainly would if I was an income investor, even at these prices. Management’s guidance of 4-6% dividend growth in the years to come is both manageable and ahead of most utility peers. I’ve looked at many picks in the utility sector in the current market, and very few of them appear to trade at or below fair value. Avista isn’t one of them. If you’re long, congratulations on holding a winner. If you aren’t and are an income investor, you should consider it.