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Summary Half a year a go I wrote an article about WEC as a dividend growth investor. The latest Q3 report will allow me to understand whether the growth prospects are present. If the acquisition is successful, WEC will have plenty of room to grow. The post merger WEC might offer a 3.5% yield, 6% EPS and dividend growth, and all that in a business that is a regulated monopoly. Introduction Six months ago I wrote an article about Wisconsin Energy (NYSE: WEC ) as a dividend growth stock. At the time, the company was just before the acquisition of Integrys (NYSE: TEG ). Another great article in June also gave investors information about the sealed deal to acquire Integrys. On November 4th, WEC published its Q3 results. The results were great as WEC has beaten the EPS consensus by 3.5% and revenue consensus by 15%. This report and the information given by the company allow me to take a first glance at the new Wisconsin Energy company. Many dividend growth investors such a myself, divide their portfolio by sectors. I don’t like the utilities sector too much, but I am willing to allocate 2.5% of my portfolio to it. In addition, dividend investors also divide the portfolio by “types” of dividend growth stocks. We have stocks with low yields with high growth, medium yield and medium growth and high yield with low growth. It shouldn’t surprise fellow investors that as a 25 years old investor, I prefer the first and second group. However, I also buy shares from the third group for current income as well as diversification. I think that Wisconsin Energy has the potential to be a great investment, as it might offer great starting yield with robust growth especially for a utility company. All that comes as WEC is a regulated company with ROE of over 12%. The outcome of the merger The new Wisconsin Energy is the leading electric and natural gas utility in the Midwest. It has acquired a new growth platform, and it will allow it to access many more clients in the Midwest. Currently, it serves 4.4 million customers which get electricity and gas from the company. It also owns gas and electric infrastructure in several states. The merger has increased the long term debt of the company significantly over the past year. The debt was issued in order to pay for the cash part of the acquisition. However, WEC prioritize to minimize the effects of the additional debt and interest on its free cash flow. It has bought TEG for a relatively low premium when compared to others, and the additional debt didn’t decrease its credit rating. The merger allowed the 8% dividend increase in June, and raised the EPS growth guidance. At the same time, credit rating is intact and the company is managing its debt wisely. The synergies between the companies will allow additional cost savings and higher profit margins. The chairman and the CEO is very happy with the merger result: Since the close of the acquisition at the end of the second quarter, we have made significant progress in focusing our six operating utilities on world-class reliability, customer satisfaction, and financial discipline. I’m very pleased with our post-acquisition work, and we remain highly confident that the merger will deliver tangible benefits to our customers, to the communities we serve, and to the stockholders who count on us to create value. The great management is confident with the merger, and the metrics support their confidence. Revenue, EPS and dividend are up, and margins are regulated by the regulator, but still reach double digits. All this happens in a large utility company that doesn’t receive enough credit from investors. Fundamentals I have discussed the historical fundamentals lengthy in my previous article. I will briefly write the main metrics, and then show the future fundamentals estimates that make me so comfortable with Wisconsin Energy. Revenue growth is irrelevant due to the huge acquisition that resulted in massive growth of the revenue and the amount of shares outstanding. EPS grew over the past decade at a CAGR of over 7%, while dividend grew at a CAGR of over 14%, both figures are impressive. The dividend and EPS are forecasted to grow at around 7% in 2016, and 6% late on. The company is willing to maintain its 67% payout ratio, and is sure in its ability to grow EPS at a CAGR of 6% for the long run. The management is committed to its dividend which is great, and it know it has to manage the debt. Currently, the company enjoys good credit rating. The company has now many more shares due to the merger, and I believe that after some deleveraging, it will use some of its excess FCF to repurchase its shares. Buyback is not something that WEC hasn’t tried already. It used $300 million to buyback its own shares back in 2014. Opportunities Wisconsin Energy is spread across several states and therefore have exposure to several regulators. Indeed, it has the largest exposure to Wisconsin’s legislatures, but the larger spread is an advantage. Moreover, the regulator is acting in stable and fair way towards the company. It allows fair ROE, and doesn’t require too many harsh and expensive measures. The declining price of natural gas is a great opportunity. Wisconsin Energy is pretty green company that uses mostly natural gas and not coal. The whole electric infrastructure is going now towards natural gas which is much cleaner. The lower price will help the company to save money, and the fact that it uses natural gas already will reduce capex that related to transforming coal power plants to gas power plants. On top of that, Wisconsin Energy is a monopoly that enjoys a promises stream of revenues. Indeed, there is tight regulation that comes with it, but still, the company proved that they know how to deal with the regulation and show high ROE and growing revenue, EPS and dividends. Risk The larger amount of debt that the company carries is a risk. Especially now after the probability for raising interest rates is higher. In a higher interest rate environment, the interest expenses will be higher. Yet, the management is aware of that, and is willing to manage the debt carefully until they lower the debt levels. Moreover, the regulation is favorable toward Wisconsin Energy now, but it might change in the future. Expensive laws can forced upon the company, and tighter regulation might demand lower ROE from Wisconsin Energy. Both these measures can harm EPS substantially. Another important point is the lower return on equity. Since the acquisition the return on equity is lower than it used to be. This is due to the acquisition itself, and management will have to take care of it as soon as possible as the decline was pretty sharp. Valuation Valuation may seem a little bit high to some investors, but I disagree. The valuation is fair, and after today’s 4% decline in the stock price it is even more fair. I find the price today reasonable for initiating a new position. WEC PE Ratio (NYSE: TTM ) data by YCharts The forward P/E on this year is 18.15 and for next year it is less than 17. I find it to be reasonable, because you actually buy value with your money. I always like to buy value for cheap, but I don’t mind paying fair price for value as well. Conclusion I will start with a quote and a graph from the latest presentation: WEC is the only company in the S&P Electric Index, S&P Utilities Index, Philadelphia Utility Index and Dow Jones Utilities Average that has grown earnings per share and dividends per share every year for the past 12 years. If you buy Wisconsin Energy now, you buy some real value especially for a utility company. You buy 3.7% dividend yield that will grow at around 6% every year for the medium term, and you get it from a monopoly that knows how to deal with the regulation, deliver good product and satisfy both its customers and its shareholders. Scalper1 News
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