Tag Archives: utility

3 Utility Mutual Funds For Steady Returns Amid Volatility

These are trying times for the markets, with most of the benchmarks striving to finish their trading days in the green and the mutual funds are not being spared either. While most of the sectors have been failing to attract investors’ attentions since the start of this year, the safe-haven appeal of the utility sector has bucked the trend to some extent. So buying utility mutual funds with strong fundamentals could help investors avoid this negative tone in a less risky manner. According to Lipper, net outflows for all equity funds came in at around $12 billion for the week ending Jan 6, indicating the market downturn. As a result, the demand for safe haven securities – such as those from the utility sector – is growing among investors. The broader S&P 500 utility sector – the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) – has attracted nearly $294.6 million of net inflow so far this year. Though the sector is only up 0.3% in the year-to-date frame, it is the only sector among major S&P 500 domains that finished in the positive territory during this period. Meanwhile, the sector gained nearly 2.6% in the past one-month period when the other major sectors registered a minimum loss of 4%. Before suggesting the appropriate utility mutual funds for your portfolio, let’s find out what is propelling the demand of securities from the utility sector. Why Utility? Concerns over China-led global growth issues and a persistent slump in oil prices dampened investor sentiment from the start of 2016, and have dragged down the major benchmarks into negative territory. Rising expectations about the lift-off of Iranian sanctions, which happened yesterday, dragged down the energy sector, which in turn weighed on the benchmarks on Friday. While WTI crude plunged by 6.1% to a 12-year low level of $29.42 per barrel, Brent crude declined nearly 0.1% to $31.01 a barrel. The VOLATILITY S&P 500 (VIX) – an important indicator of volatility level – jumped 12.2% on Friday and surged 6.3% in the year-to-date frame. In this volatile environment, the utility sector provides safety to investors due to its higher immunity against market peaks and troughs. Though the utility sector, which requires a high level of debt, was initially affected by the rate hike, its safe haven appeal gradually offset the impact. Also, after declining significantly in 2015, utility stocks are now offering attractive entry points. Meanwhile, the sector is also popular among investors for generally offering stable and healthy yields. Additionally, demand for essential services such as those provided by utilities is believed to remain unchanged even during difficult times. This is also an important factor behind the stability of the sector even during a market downturn. 3 Mutual Funds to Buy Given the safety and yields that are latent in the sector under discussion, below we present 3 utility mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have encouraging 4-week, and 3- and 5-year annualized returns. The minimum initial investment is within $5000. These funds also have a low expense ratio. American Century Utilities Fund Investor (MUTF: BULIX ) invests a large portion of its assets in equities related to the utility industry. BULIX’s portfolio is constructed on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features. BULIX currently carries a Zacks Mutual Fund Rank #1. It boasts a 4-week return of 3.2%. The 3- and 5-year annualized returns are 9.2% and 8.6%, respectively. The annual expense ratio of 0.67% is significantly lower than the category average of 1.25%. BULIX has a yield of 2.87%. Franklin Utilities Fund A (MUTF: FKUTX ) seeks capital appreciation and current income. FKUTX invests a large chunk of its assets in common stocks of public utilities that are involved in providing electricity, natural gas, water, and communications services. FKUTX currently carries a Zacks Mutual Fund Rank #2. It has a 4-week return of 4.1%. The 3- and 5-year annualized returns are 9.2% and 10.5%, respectively. The annual expense ratio of 0.73% is also lower than the category average. FKUTX provides a yield of 2.77%. Fidelity Telecom and Utilities (MUTF: FIUIX ) focuses on acquiring common stocks, investing heavily in telecom and utility companies. FIUIX may purchase both foreign and domestic securities. FIUIX utilizes fundamental analysis to select its holdings, studying both firm-specific and broader market and economic factors. FIUIX currently carries a Zacks Mutual Fund Rank #2. It boasts a 4-week return of 3.3%. The 3- and 5-year annualized returns are a respective 7.7% and 9.2%. The annual expense ratio of 0.79% is lower than the category average. FIUIX provides a yield of 2.06%. Original Post

Ameren: A Solid Dividend Play With Attractive Long-Term Prospects

Summary Headquartered in Saint Louis, Missouri, Ameren Corporation provides utility services throughout the states of Illinois and Missouri. Ameren’s management expects the company to demonstrate a 7%-to-10% compounded annual EPS growth rate between 2013 and 2018 and a 6% compounded annual EPS growth rate between 2014 and 2019. As of Friday’s Close, shares of Ameren were yielding 3.89% ($1.70) and trading at P/E ratio of 17.9. When it comes to finding a solid dividend investment there’s a lot more that goes into it then just settling on an attractive yield and a reasonably attractive P/E ratio. With that said, I wanted to take a closer look at and highlight a number of reasons as to why I’ve chosen to stay long on shares of Ameren Corporation (NYSE: AEE ) which currently yield 3.89% ($1.70) and offer a P/E ratio of 17.9. Company Overview Headquartered in Saint Louis, Missouri, Ameren is a fully rate-regulated electric and gas utility company that is broken down into three operational segments. These segments are its Ameren Missouri segment (which serves 1.2 million electric customers and 127,000 gas customers throughout the state of Missouri), its Ameren Illinois segment (which serves 1.2 million electric and 813,000 gas customer throughout the state of Illinois) and its Electric Transmission segment (which invests in the various types of multi-value and local reliability projects throughout the state of Illinois). It should be noted that the company has a total of 3.3 million total customers (that total can be broken down into 2.4 million electric customers and 900,000 natural gas customers), 10,200 MW of regulated electric generation capability, and approximately 4,600 miles of FERC regulated electric transmission. ( Company Presentation – December 2015 ) A Pretty Solid Strategic Plan One of the most intriguing things to consider when it comes to investing in Ameren is clearly the company’s strategic plan. The plan, which is a multi-tiered approach, can be broken down into three primary strategies. According to the company’s December Investor Meeting Presentation these strategies include : Investing in and operating its utilities in a manner that is consistent with the existing regulatory frameworks that directly affect the company’s operations in both Illinois and Missouri. The enhancement of regulatory frameworks (such as its FERC-regulated electric transmission service, its Illinois Electricity service, its Illinois Natural Gas service, and its Missouri Electricity service) and advocating for responsible energy policies within both the Illinois and Missouri marketplaces. Creating and capitalizing on opportunities for investment for the benefit of both its customers and our shareholders. As long as Ameren can stay the course, I see no reason why this strategic plan will not be beneficial to shareholders moving forward. If historical stock performance is any indication of management’s success over the last five years (shares of AEE have posted a CAGR of 10.88% since December 2010), then there’s a very good chance we could see the same, if not, an even better performance over the next five years. A Strong Long-Term Earnings Outlook When a company notes that it expects to stay on course and deliver a 7%-to-10% compounded annual EPS growth rate between 2013 and 2018 and also deliver a (very conservative) 6% compounded annual EPS growth rate between 2014 and 2019 to its shareholders, I’m quite impressed. That being said, the 6% compounded annual EPS growth rate between 2014 and 2019 is very conservative considering the fact that it plans on achieving such growth without issuing any additional equity for at least the next 48 months. So what are some the drivers that are directly affecting the company’s long-term earnings growth, you ask? As a whole, Ameren will want to continue to reduce its operational and maintenance-related expenses, its parent company’s interest-related charges, and increase its investments in both electric transmission and delivery infrastructure over the next 12-24 months. It should be noted that analysts expect Ameren to earn $2.61/share for 2015 and $2.71/share for 2016. That being said, the latter of the two estimates which is the $2.71/share estimate for 2016 is a bit conservative especially if we were to apply either of the above mentioned compounded annual EPS growth rates to its estimated 2015 full-year earnings of $2.61/share. For example, if we were to apply the 7%-to-10% compounded annual EPS growth rate we’d see an estimated EPS range of $2.79/share-to-$2.87/share and if we were to apply the compounded annual EPS growth rate of 6% we’d see an estimate of $2.77/share. Recent Dividend Behavior On Monday, October 12, Ameren announced a quarterly dividend increase of $0.015/share, which brings its quarterly dividend payout to $0.425/share. It should be noted that the increase will be paid on December 31 for shareholders of record as of December 9. This boost represents a 3.65% increase from its prior dividend of $0.41/share. Based on the company’s dividend history over the last twelve months, I strongly believe we could begin to see a more consistent pattern of annualized dividend increases over the next 3-5 years as long as earnings growth stays consistent with the above mentioned estimates and the company holds true to its course in terms of maintaining the strategic plan that is currently in place. Conclusion For those of you who may be considering a position in Ameren, I strongly recommend keeping a close eye on the company’s compounded annual EPS growth rate as well as its long-term dividend growth rate over the next few years. Both of these particular growth rates will be directly affected by its ability to stay within the means of the strategic plan that is currently in place as well as the continued investment in its FERC-regulated electric transmission service and the utility services that it provides to customers who reside in the states of Illinois and Missouri.

Exelon: Utility Selling At 10-Year Lows, Again

Exelon’s share price bottomed in 2013 at $26.91, rose to $36.83 in Aug 2014 and Dec 2014, only to drop to $26.60 this month. The long-term investment thesis remains the same. Exelon’s profitability is still dependent on competitive wholesale prices driven by natural gas pricing. Two years ago, almost to the day, I penned an article discussing Exelon (NYSE: EXC ) trading within a hair’s breath of its 10-yr low. Unfortunately, I can write a follow-up as this is the case again. It seems EXC is just as controversial today as it was back then, and uncertainty remains the major obstacle. New income investors looking for higher relative yields should review EXC and current shareholders should continue to hang in and even add to their position. In the previous article, the investment thesis was laid out: Management and investors are making a huge bet that demand will increase, wholesale pricing will increase, and base-load capacity will decrease. Demand will increase with strengthening economic activity in the Northeast and Midwest. Pricing will pick up with a turn in natural gas pricing. Base-load capacity will decrease as coal-fired plants are retired and as more intermittent-load wind replaces investments in additional base-load capacity. When these three events positively influence EXC’s bottom line, share prices will be substantially above their current 10-year lows. However, these events have not happened, and the timeframe continues to get pushed out. With the growth of natural gas as a generating fuel, electricity pricing continues to be influenced by the price of natural gas. As we know, natural gas is once again sub-$2.00, applying pressure on electricity pricing. Below are three graphs from sriverconsulting.com that tell the story. The first is the Forward Market price for electricity in ISO New England. The most recent forward price matches its 10-yr low of March 2012. The second shows the relationship of the 5-yr forward price of natural gas and electricity and the third shows the same relationship on a 1-yr basis. The last two charts demonstrate the correlation between natural gas pricing and electricity pricing, and the trend over the previous 12 months has been for tighter correlations. As of the week of Dec 9, the forward 12-month NYMEX price for natural gas was $2.34. (click to enlarge) Source: sriverconsulting.com (click to enlarge) Source: sriverconsulting.com (click to enlarge) Source: sriverconsulting.com Natural gas pricing will continue to be a key factor in PJM markets. According to ISO New England, in 2000, natural gas represented 15% of the fuel used to generate power in the Northeast, and this percentage grew to 44% in 2014. The growth has been at the expense of coal and oil, with these fuels declining from 18% to 5% and 22% to 1%, respectively. Nuclear remained almost constant at 31% and 34%. The following 17-yr chart shows the growth in MW capacity by fuel type in the Northeast, as offered by the ISO New England 2015 Regional Electricity Outlook. (click to enlarge) One advantage of merchant power generators in other parts of the US is many utilize 20-yr purchase power agreements with electric distribution utilities, usually including a “fuel cost plus” formulation. However in the Northeast, Mid-Atlantic and eastern Midwest, pricing is controlled by the Regional Transmission Organizations RTO, of which PJM Interconnect is the largest. The silver-lined underbelly of the auction process is the premium PJM now allows for “reliability,” and EXC’s nuclear generation qualify for these premiums. During the Polar Vortex of early 2014, power generation along the East Coast was dangerously close to falling under demand as frozen coal stocks and frozen natural gas valves caused an uncomfortably large amount of generating capacity being off-line. In response, PJM instituted an added premium for power generation with higher commitments to remain online, backed by huge fines for those who take the premiums but can’t deliver during similarly stressful times. Nuclear power, of which Exelon is the largest provider, is a qualified fuel for this premium. Over the next two years, this premium will be implemented and will help EXC realize a bit higher price for its commodity product. Demand and capacity retirements have been progressing along as expected, with additional nuclear plants announcing their retirement. Even after the acquisition of Pepco Holdings (NYSE: POM ), which is now expected to be EPS-neutral over the short-term, power generation sold mostly using the PJM 3-Yr Rolling Auction process will still represent about 50% of EXC’s earnings. While this exposure to the merchant market has declined from 80% in 2008, the graphs above have a large impact on earnings for EXC. Concerning the proposed merger with Pepco, management seems to have satisfied DC regulators with the move of some executives and their offices to the Washington area, along with $78 million in payments to DC customers. Exelon agreed to relocate 100 jobs from outside D.C. into the city and create an additional 102 union jobs. The company also agreed to co-locate its headquarters in D.C. Exelon has six months after the merger is approved to relocate elements of its corporate headquarters from Chicago to D.C. It will shift the primary offices of CFO Jack Thayer and Chief Strategy Officer William Von Hoene Jr. to D.C., as well as the entire Exelon Utilities division, which is now based in Philadelphia, along with divisional CEO, Dennis O’Brien. The merger could be finalized before management’s commitment to walk away if not completed by April 2016. Over the longer term, management estimates the merger can increase earnings by $0.25 a share over the next 4 years, or about 9% of the estimated $2.57 2016 EPS. Management believes the acquisition of Pepco will accomplish two important goals: the ability to fund the dividend entirely through its regulated businesses and the ability to gain sufficient critical mass to separate the regulated and unregulated businesses, if advantageous to shareholders. On a valuation basis, EXC offers an inexpensive entry point. Below is a comparison of fundamentals for EXC vs. the utility average, as offered by Morningstar.com: Source: morningstar.com, Guiding Mast Investments Consensus earnings estimate for next year have been increasing since June 2015. Below is a chart of 12-month consensus EPS estimates for 2015 and 2016, as offered by 4-traders.com. Insidermonkey.com wrote a positive article on EXC earlier this month. In summary: It’s been a down year for most utility companies as big mutual funds rotate out of the sector due to normalizing yields. Although Exelon Corporation shares are down 23% year-to-date because of the Great Rotation, Exelon’s decline has made it an attractive dividend play. Shares now yield 4.57% and trade at a reasonable 10.6 times forward earnings. Seeing as the company’s payout ratio of 0.55, Exelon’s dividend is secure and has room to expand given the company’s predicted next five year average EPS growth rate of 5.03%. Hedge funds are certainly bullish as the number of elite funds long the stock jumped by 10 during the third quarter. According to morningstar.com, in 2014, EXC’s total return was +39.9% while year-to-date total return has been a negative -23.0%. This compares to +20.3% and -11.3% for Diversified Utilities and +28.7% and -6.9% for the S&P Utility ETF (NYSEARCA: XLU ), respectfully. While the past 2 years have not been as profitable for EXC shareholders as the average industry investment, the current yield of 4.9% should be sufficient for income investors to buy and hold for the “eventual turnaround” in the same investment thesis outlined above. These 10-yr lows in share prices only come around every 10 years… or every 2 years in the case of EXC. Author’s note: Please review Author’s disclosures on his profile page.