Tag Archives: dividend

PNM Resources: Priced Just Right

Summary Management has made significant steps in past five years to improve profitability. Margins are up, energy generation mix is improving. Dividend has followed suit. Heavy interest expenses and overhang of the company’s large ageing coal plant concerns me. PNM Resources (NYSE: PNM ) is a holding company operating two regulated utilities, one in New Mexico and Texas. The company had a rough go of it from 2007-2011; exiting from non-regulated businesses at great cost focus on only serving regulated customers. Management may not have known what they were in for, as the next few years of regulatory environment were tough, with harsh allowed returns and strict oversight. PNM Resources was forced to heavily cut the dividend in between 2007 and 2009 as wholesale electricity prices plunged, chopping it nearly in half from $0.91/share to $0.50/share. The dividend remained stagnant at those depressed levels until a 2012 hike. This marked the start of a company revitalization as PNM Resources has bumped the dividend significantly, averaging 15% per year since then, as operating results recovered. Shares have responded to the flood of good news, rallying off lows near $10/share in 2010 to nearly $30/share today, recovering most of their losses from 2007-2010. Is there more upside for shares? Business Overview The company operates a diversified portfolio of over 2,500MW in generation capacity. Like many utilities, PNM is reducing its reliance on coal, instead shifting to natural gas. However, the largest generation facility for PNM Resources remains its San Juan Generating Station in Waterflow, New Mexico. This plant used to be much larger, but the company was forced to retire 900MW of capacity on regulator and environmentalist pressure – or face heavy capital expenditures related to mandatory upgrade costs. It is likely that this plant will continue to see aggressive treatment by regulators as coal continues its slow-and-steady decline as a source of power in the United States. Investors should expect continued power generation and compliance costs with the overhang of possible additional restrictions on aged coal-fired facilities like this one. PNM Resources expects to keep remaining capacity here online until at least 2022 given the recent contract extension with a local coal supplier for fueling needs. Operating Results (click to enlarge) While 2011 was a much bigger revenue year for 2011, that doesn’t tell the entire story. 2011 was a turning point year where many changes went into place at PNM Resources. The company exited its non-regulated businesses in Texas in 2011 ($329M in proceeds), using the proceeds to pay down debt and repurchase shares. This divesture followed the exiting of New Mexico Gas in 2008 as the company struggled to stay afloat, facing mounting losses in wholesale energy where the company simply couldn’t compete. Tough choices were made and SG&A expenses were cut as well as PNM Resources streamlined its operations. All told after a lot of work, all these changes have resulted in much better operating margins from 2012 forward. (click to enlarge) PNM Resources has run cash deficits as we can see from above, which has been paid for by more than $500M in net long term debt issuance since 2011. Like I feel with most mature utilities, I really want to see these numbers temper. Continued weakness here means no cash flow available for increased dividend payments without increasing leverage through long term debt or dilutive common stock issuance. Interest expense already eats 40% of operating income, well ahead of most other utility businesses I’ve looked at in the past. Conclusion At around 16x 2016 earnings estimates, shares aren’t the most expensive utility shares out there, but they don’t appear to be the cheapest either. The current dividend yield of 2.85% is in-line with historical averages. Management has guided towards 8% dividend growth, which I think is achievable assuming capital expenditures come down and demographic trends continue to be favorable in New Mexico and Texas. The heavy interest expense and lack of operational cash flow concern me. Shares are likely fairly valued at current prices, but investors who are looking to pick up shares of PNM Resources are best served by playing the waiting game and entering around $25.00/share, a spot where shares have tested and experienced solid support over the past year.

Why I’m Reiterating Income Investors Buy Consolidated Edison Instead Of Southern Company

Summary Southern Company’s 4.8% dividend yield beats many of its sector peers. But that is mostly because of Southern’s declining stock price in 2015. Fundamentally, Southern is struggling. Its revenue and core earnings are declining, due to major cost overruns at its Kemper project. Meanwhile, ConEd allows investors to sleep well at night, which should be the main concern when buying utility stocks. As a result, I continue to favor ConEd over Southern. Income investors are likely drawn to Southern Company (NYSE: SO ) and its 4.8% dividend yield. But Southern has given investors a number of headaches over the past year related to its massive Kemper project. Repeated completion delays and cost overruns have negatively affected Southern’s earnings over the past year. This has caused Southern to underperform many of its peers like Consolidated Edison, Inc. (NYSE: ED ) so far this year. Even though Southern Company’s dividend yield beats ConEd’s, I think ConEd is the better utility stock to buy. ConEd’s 4% dividend yield slightly trails Southern’s yield, but that is only because Southern’s stock price has declined this year. Investors should think about total return, and not just dividend yield, when evaluating an investment opportunity. ConEd has much smoother earnings growth, while Southern’s earnings are unusually volatile, especially for a utility. For these reasons, I recommend income investors consider ConEd instead of Southern. Trouble Lurks On the surface, there doesn’t seem to be anything wrong with Southern. Earnings per share grew 1% last quarter , and 15% in the first six months of 2015, year over year. That looks quite strong at first glance. But there are a number of caveats that make Southern’s true underlying earnings much less impressive than they appear. First and foremost, Southern is benefiting from a very easy comparison. Last year’s quarterly results were heavily weighed down by huge charges against earnings, due to the Kemper project. This has made Southern’s 2015 earnings results show solid growth, but that is only because last year’s numbers were so badly depressed. If you strip out the excess charges throughout 2014, Southern’s adjusted earnings are actually down 4.4% through the first six months of 2015. Therefore, investors looking at the headline reported numbers only may get a distorted image of Southern. The fact that excess cost overruns at Kemper have moderated somewhat this year is not exactly cause for celebration. Southern’s operating revenue declined 6.5% over the first six months of 2015, year over year, which is a disturbing indicator of the company’s shaky underlying fundamentals. This is why Southern’s stock price is down 8% year-to-date. Plus, the forward-looking picture is cloudy at best. Southern now anticipates the Kemper project will not be placed into service until after April of 2016. This will result in $15 million in additional total costs. Moreover, the company expects to incur $25 million-$30 million in additional costs each month for deferring the start-up beyond March, and another $20 million per month in financing and operating costs. If that weren’t bad enough, because the project will be delayed beyond April 19, Southern would be required to return $234 million to the IRS, which is what the company had received in prior tax credits for the project. In its press release, Southern vowed that its customers will not foot the bill for the added costs. Since there are no free lunches, someone has to foot the bill, and that someone will be Southern and its shareholders. As a result, while things are “less bad” this year than last year, it appears there is more trouble in store for future quarters. Reiterating My Preference For Consolidated Edison Income investors may see Southern’s higher dividend yield and stop there. But dividend growth is a consideration as well, and if Southern’s revenue and core earnings continue to decline, the company may not be able to maintain dividend growth that meets inflation. Southern has paid a dividend for 271 consecutive quarters, dating back to 1948. For its part, ConEd is no dividend slouch. It has increased its dividend for 41 years in a row. This makes ConEd a Dividend Aristocrat, while Southern is not. More importantly, Southern is struggling to grow revenue and earnings consistently, and Kemper is only exacerbating the problem. Meanwhile, ConEd gives investors stable revenue and earnings growth, as the company has not had nearly as many operating issues as Southern. For example, ConEd grew EPS by 3% last year, and is off to another good start to the current year. ConEd’s core earnings per share are up 11% through the first six months of 2015, year over year. Going forward, investors should continue to enjoy stable earnings growth. The company expects full-year earnings to reach $3.90 per share-$4.05 per share. At the midpoint of its forecast, that would represent 6.5% earnings growth from 2014, which would be a very solid earnings growth rate for a utility. I last wrote about my preference for ConEd over Southern in this article , dated June 15. Since the day that article was published, ConEd has outperformed Southern by 10 percentage points. Given Southern’s inability to get things right at Kemper, and ConEd’s solid growth, I expect ConEd’s outperformance to continue. Disclaimer : This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.

Consolidated Edison’s Place In A Dividend Growth Portfolio

Consolidated Edison is known as a slow growing utility. Yet this alone has not precluded the security from providing reasonable returns. This article illustrates what an investor ought to require in order for the company to have a place in your dividend growth portfolio. Tracing its roots back over 180 years, Consolidated Edison (NYSE: ED ) provides electricity for 3.3 million customers and gas to 1.1 million customers in and around New York City. You might imagine that this business is fairly stable. Indeed, the company has not only paid but also increased its dividend for 41 consecutive years . That’s an investing lifetime for many, each and every year waking up to more and more Consolidated Edison dividends. The way the company operates is a slightly different from your typical dividend growth firm. That’s to be expected: it’s a regulated utility. Yet this alone does not preclude it from providing reasonable returns. I’ll demonstrate both points below. Here’s a look at both the business and investment growth of Consolidated Edison during the 2005 through 2014 period: ED Revenue Growth 1.1% Start Profit Margin 6.2% End Profit Margin 8.3% Earnings Growth 4.5% Yearly Share Count 2.0% EPS Growth 2.1% Start P/E 15 End P/E 18 Share Price Growth 4.0% % Of Divs Collected 46% Start Payout % 76% End Payout % 70% Dividend Growth 1.1% Total Return 7.3% The top line growth certainly isn’t impressive. As a point of comparison, companies like Coca-Cola (NYSE: KO ), Boeing (NYSE: BA ) and Procter & Gamble (NYSE: PG ) were able to grow revenues by 8%, 6% and 4% respectively over the same time period. Of course this is easily anticipated: utilities by their nature tend to be slow growing. The demand for their product is fairly consistent and doesn’t suddenly accelerate with the advent of a new higher efficiency light bulb. So 1% annual revenue growth sets the stage. From there the company has been able to increase its net profit margin, resulting in total earnings growth that outpaces total revenue growth. If the number of common shares outstanding remains the same, total earnings growth will be equal to earnings-per-share growth. Yet this situation rarely holds. With you typical dividend growth company you see shares being retired over the years due to share repurchases. As a point of reference, about three-fourths of the current Dow Jones (NYSEARCA: DIA ) components have reduced their share count in the last decade. Utilities tend to do the opposite – selling shares to raise capital. Consolidated Edison has been no exception, increasing its share count from about 245 million in 2005 to 293 million by 2014, or an average compound increase of about 2% per year. As such, EPS growth trailed overall company profitability, coming in at just over 2% per year. If the earnings multiple remains the same at the beginning and end of the observation period, the share price appreciation will be equal to EPS growth. In this case, investors were willing to pay about 15 times earnings at the start as compared to roughly 18 times at the end of 2014. As such, the share price increased by 4% per year. If you were to look at a stock chart, this is all that you would see. Yet an even larger component to the overall return was dividends received. Remember, investors were able to collect a rising stream of income over time. The magnitude of these increases has not been impressive in any sense: coming in at just over 1% annually. Yet the beginning payout ratio was above 75%. When coupled with a reasonable valuation, this equates to starting dividend yield of about 5%. So investors were able to collect nearly half of their beginning investment in this slow grower. All told capital appreciation would have accounted for about $20 worth of additional value while you would have also received about $21.50 in dividend payments. Your total return would have been roughly 7.3% per year. Now surely this isn’t overly impressive – it’s more or less in line with what I would deem “reasonable” returns. Yet it should be noted that the slow growth didn’t prevent you from increasing your wealth. Moreover, the annual return is in-line with or better than what Procter & Gamble, Caterpillar (NYSE: CAT ), UnitedHealth (NYSE: UNH ) or Intel (NASDAQ: INTC ) provided during the same time period. Its not always about the growth, the interaction of the value components also makes a difference. The reason that Consolidated Edison provided reasonable returns was related to two factors: investors were willing to pay a higher of a valuation and the dividend yield started near 5%. Moving forward, you likely want to think about the repeatability of those components. More than likely Consolidated Edison isn’t going to “wow” you with its upcoming growth. Analysts are presently expecting intermediate-term growth in the 2% to 3% range , much like the past decade. As such, the valuation that you require to invest should be paramount. You can pay a bit more for a company that grows by 8% or 10% and “grow out of” a slight premium paid. When you have a much lower growth rate, your margin of error is much lower. As a for instance, imagine company that grows earnings-per-share by 2% annually over the next five years. If you paid say 17 times earnings and it later trades at 15 times earnings, this results in negative capital appreciation. On the other hand, if you pay 17 times earnings for a company that grows by 8% per year and it later trades at 15 times earnings, this equates to 5.3% annual price appreciation. The penalty of “overpaying” is far less severe for faster growing companies. Thus in contemplating an investment in Consolidated Edison you should be especially mindful of the price paid. (Naturally this holds for any company, but even more so with slower expected growth.) Over the past decade shares have routinely traded in the 12 to 18 P/E range. While its possible to see a valuation outside of this range, you’d likely want to demand something on the lower end of the spectrum in order for the security to look comparatively compelling. The second important thing to note is that the dividend payment is apt to play a much larger role than your typical investment. You know the rate of dividend increases likely isn’t going to be substantial, so once more the focus is on demanding a reasonable starting yield. It’s the high starting yield that allows an investment in Consolidated Edison to rival that of the Procter & Gamble’s of the world. Without a reasonable yield premium the investment doesn’t have many more levers at its disposable. An investment in Consolidated Edison is an investment in the dividend, with the occasional revision in valuation. Alternatively, with a reasonable dividend yield and reinvestment, it’s a reliable way to see your income increase by 5% or 6% annually. In short, just because Consolidated Edison hasn’t grown very fast doesn’t mean that it can’t be a reasonable investment. As illustrated above, just 1% annual revenue growth turned into 7%+ yearly returns. Moving forward, the same drivers – valuation and dividends received – will continue to play an outsized role in future returns. As such, focusing on these components from a slow growing utility becomes central to a successful investing process.