Tag Archives: dividend-ideas

Ameren Corporation: Creating Stable Income Streams At Less Risk Than The Market

Summary The public utility sector is going through a challenging period. Experts are mixed on the long-term prospects of the stock, but median estimates give a 12.55% upside at current levels. Ameren has only reduced its dividends once, during the 2008-09 crash. Ameren Corporation (NYSE: AEE ) is a natural gas and electric utility company that operates in Illinois and Missouri. It is operating in a challenging business environment with evolving environmental regulation. The experts are mixed regarding Ameren’s future stock value; however, the median estimate provides an upside of 12.55% at current price levels. Ameren produces a stable and predictable dividend which mitigates a small amount of market risk when holding the stock. The Company is a buy for risk-averse investors who are looking for an income stream that is relatively unlinked to general market risk. Major trends in common to the electric and natural gas utility industry ( F rom the 10-K ) Political, regulatory, and customer resistance to higher rates. Tax law changes that accelerate depreciation deductions, which reduce current tax payments but also result in rate base reductions and limit the ability to claim other deductions and use carry-forward tax benefits. Cybersecurity risks, including loss of operational control of energy centers, and electric and natural gas transmission and distribution systems and/or loss of customer data. Increased competition in supply, generation, and distribution. Pressure to grow customer base in light of economic conditions and energy efficiency initiatives. The availability of fuel and fluctuations in fuel prices. Higher levels of infrastructure investments could result in decreased free cash flows. Company Positioning Ameren’s primary assets are its subsidiaries including Ameren Missouri and Ameren Illinois. Both of these subsidiaries are rate-regulated electric generation, transmission and distribution businesses as well as rate-regulated natural gas transmission and distribution businesses. Ameren’s other subsidiaries are responsible for activities such as the provision of shared services. Another of Ameren’s subsidiaries, ATXI, operates a FERC rate-regulated electric transmission business. (click to enlarge) Ameren’s profits and subsequent dividend payouts are dependent upon these regulated revenue streams. Growth Strategy ( F rom the 10-K) Renewable Mandate: Ameren is expected to increase its renewable energy resources to 10% of its total portfolio by 2015 and 25% by 2025. It is achieving these goals through IPA agreements and long-term contracts with renewable energy suppliers. Transmission and Distribution: AEE is involved in multiple transmission generation products which should alleviate congestion and bring access to new economic zones. Energy Efficiency: Ameren Missouri and Ameren Illinois have implemented energy efficiency programs. In Missouri, the MEEIA established a regulatory framework that allows electric utilities to recover costs related to customer energy efficiency programs. A MEEIA rider allows AEE to collect from or refund to customers any annual difference in the actual amounts incurred and the amounts collected from customers for the MEEIA program costs and lost revenues. Risk Management ( From the 10-K) Regulatory and Environmental Matters: Ameren is subject to a complex legal environment. The EPA is developing and implementing environmental regulations that will have a large impact on the electricity industry. Its coal-fired plants may incur significant costs to comply with these regulations. Natural Gas Price Fluctuation: AEE’s natural gas procurement strategy is designed to ensure immediate delivery of natural gas. The strategy is accomplished by optimizing storage options and various supply and price-hedging agreements that allow for diversification of supply source. Grid Reliability: Significant investment is going into making the grid more reliable. The increased use of distributed generation and the uneven output of renewable generation have complicated grid management, so the Company must invest in more sophisticated grid management systems. Dividends (click to enlarge) From dividend.com (click to enlarge) From dividend.com AEE has a very consistent dividend performance. The Company has only lowered its dividends once, and has maintained stable payouts. Since the dividend payout is stable, the dividend yield moves inversely to the price performance of the underlying stock and mitigates some of the market risk of holding the AEE stock. Expert Opinion (click to enlarge) From Yahoo Finance The expert opinion on AEE is mixed. Most analysts recommend holding the stock and not expanding positions at the current time. The median expert estimate on AEE’s stock price is $42.5, which gives the Company a 12.55% upside at the current price of $37.76 per share. AEE’s beta is 0.21. From Yahoo Finance AEE has been positively surprising the experts with its quarterly EPS releases; this usually means that analysts are undervaluing some portion of the Company. Recent News: Ameren Illinois continuing major upgrades to strengthen the region’s energy delivery network DiversityInc Ranks Ameren First in the Nation Ameren Missouri’s Callaway Energy Center Receives Extended Operating License From the Nuclear Regulatory Commission Retired Chairman and CEO of Unisys (NYSE: UIS ) Elected to Ameren Board of Directors Conclusion Ameren is a straight forward public utility play with exposure in Illinois and Missouri. Its revenues depend upon rate-making policy decisions, environmental policy and natural gas price levels. An investor who is looking for a company that produces stable dividends and has low market risk, would feel right at home with AEE. While the experts are uncertain about the future stock price levels, the median estimate does provide a 12.55% upside at current levels. If you are a risk-averse investor who wants to create a stable income stream with little market risk, Ameren is for you. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Cheap Stock With A High Yield Or High Yield With A Cheap Stock? How About Both?

TECO Energy is valued at a substantial discount to its peers based on its forward PEG ratio. TECO Energy offers a current yield of 5.02%. The stigma of its discontinued coal operations along with a dismal dividend growth profile is holding back share prices, but should change with its renewed focus on regulated assets. Are you a value buyer looking for peer undervaluation or are you looking to garner higher income from your invested capital, or a little bit of both? If so, TECO Energy (NYSE: TE ) should be of interest. TE is trading at a comparatively large discount to its anticipated growth rate for the utility sector and the current yield is 5.02%. One measure of fundamental value is the PEG ratio, or price to earnings to earnings growth. Utilities are always on the top of the PEG valuation scale due to slow growth and outsized yields. In most sectors, fair valuation is usually considered at 1.0 for large caps and 1.2 for smaller caps. Over 1.2 is considered overvalued and below 1.0 is undervalued. For utilities, however, it is not uncommon for the PEG ratio to be over 3.0. The PEG ratio for utilities is best used for peer comparisons. One tool that has been used since the early 1970s is the forward PEG ratio, or fundamental valuation based on anticipated 5-yr growth rates and forward earnings estimates. The forward PEG has been one of my personal uppermost due diligence considerations since researching stocks using Value Line in the local library way, way before the internet. The reference librarian got to know me pretty well. However, I digress. Yardeni.com offers an interesting chart of the forward PEG for the utility sector going back 20 years, as represented by the S&P 500 Utility Sector. Below is the chart of the current forward PEG ratio (green line), relative sector P/E to the S&P 500 forward P/E (blue line), and the current forward PEG ratio (red line): (click to enlarge) The current utility sector forward PEG is 3.2 and the average forward P/E is 15.8, reflecting a sector-anticipated growth rate of 4.9%. Enter TECO Energy. The company is going through a transition by selling its coal mining operations to focus solely as a regulated natural gas and electric utility. Its geographic coverage is Tampa Electric (700,000 customers) and Peoples Gas (350,000 customers) in Florida and recently acquired New Mexico Gas (513,000 customers). Earnings per share guidance by management in 2015 is in the $1.08 to $1.10 range, with 2016 consensus estimates of $1.18 to $1.22. Progression in estimates is based on an expansion of its regulated asset base of between 4% and 7%, recent Florida rate case approval with agreed rate increases until 2018, and an allowed ROE in the favorable 10.25% range. TE’s earnings growth rate is offered at between 9.0% and 11.5%, and substantially above the sector average of 4.9%. TECO is trying to sell its coal producing assets in Virginia, Kentucky, and Tennessee. Held as a discontinued asset since third quarter 2014, TECO Coal LLC had a buyer for $80 million in cash and potential future payments of $60 million based on performance targets. However, with the current financial stress of the coal industry, the buyer was unable to acquire the necessary financing and the sale did not close earlier this month. Last week, TE announced a new buyer had stepped in with a 30-day close schedule, but neither terms nor buyers were disclosed. For all intents and purposes, these assets have been written down and the immediate benefit to shareholders from the sale will be a one-time cash inflow of between $0.20 and $0.50 a share. Historically, the coal business has been a large segment of earnings, representing upwards of 30% of net income. As recently as 2011, coal generated over $50 million in income, and coal could be counted on to supply earnings per share of between $0.25 and $0.40 annually. Using the lowest 2016 earnings estimates of $1.13 and the lower project growth rate of 9%, TE’s forward PEG would be 1.7, substantially below the 3.2 of the sector. The current valuation of TE at $17.80 equates to a sector-average forward P/E of 15.7. The undervaluation is based on a much higher growth rate profile. TE’s current yield is 5.02% and represents a substantial income advantage to the sector average 3.5% yield. TE falls in the top tier of utility dividend payers for yield, but offers the disadvantages of a high payout ratio and very low historic dividend growth. While earnings growth is expected to be above average, until the payout ratio declines from around 87% last year to a more comfortable 65% to 70%, investors should not expect dividend growth above a mere nominal level. For example, 3-yr TE dividend growth is 1.3% and 5-yr dividend growth is 1.9%. The best investors should expect over the next three years is inflation-matching dividend growth. However, the current yield of 5.02% should pique the interest of income seekers. Historically, natural gas utilities offer some of the lowest yields in the sector. Using Hennessey Natural Gas Utility Fund (MUTF: GASFX ) and a few of the more popular gas utility stocks as proxies, the representative yield could be between 2.1% and 3.3%. With 50% of customer count from its gas utilities, TE’s yield is comfortably above these averages. Management has generated returns on invested capital in excess of sector average. With peer-average in the 4.5% to 5.0% range, TE’s 5-yr average ROIC is 6.0%, and 3-yr average ROIC is 5.5%. However, their cost of capital is high at 5.7%, according to ThatsWACC.com. TECO could be either an acquirer of smaller utilities, such as its purchase of New Mexico Gas, or as a candidate in the continuing march of utility consolidation. Until the stigma of coal is washed from investors’ memory, TE will trade based on its yield and not its growth prospects. If management delivers on its regulated growth platform, today’s share price and corresponding yield could be looked at as being both cheap and high yield. Author’s Note: Please review disclosure in Author’s profile. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in TE over 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.

My Favorite Utility Stock: 41 Consecutive Years Of Increased Dividends

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.