February 2019 Watchlist (Utilities)

It’s time to come back to the topic which was bugging me for some time now. My portfolio doesn’t have any company from the Utility sector. I did a quick overview of Utility companies in my local market (Nasdaq Baltic) last autumn but wasn’t convinced with any one of them. I decided to have a look at Utility companies operating in the US this time.

Utility sector is attractive for several reasons. Firstly, dividend yield of Utility companies is often quite high. Furthermore, companies in Utility sector usually have very low or even negative Beta ratio. It means that the prices are not that dependent on general market which would be a good thing if we see a recession at some point.

It comes with some drawbacks as well, though. You won’t experience large growth from Utility companies normally. Even though it is considered safer than usual investment, we still need to weigh the risks. It is not bulletproof, as we saw from the recent bankruptcy of PG&E after California wildfires.

In this post I am going to run a quick overview of 3 companies that are darlings of dividend growth investors.

Dominion Energy, Inc. (D)

First up is a Utility company which has been a target of a few dividend investors lately. Shortly about the company:

Dominion Energy, Inc., commonly referred to as Dominion, is an American power and energy company headquartered in Richmond, Virginia that supplies electricity in parts of Virginia, North Carolina, and South Carolina and supplies natural gas to parts of West Virginia, Ohio, Pennsylvania, North Carolina, South Carolina, and Georgia. Dominion also has generation facilities in Indiana, Illinois, Connecticut, and Rhode Island.

The company acquired Questar gas in the Western United States, including parts of Utah and Wyoming, in September 2016. In January 2019, Dominion Energy completed its acquisition of SCANA Corporation.

There are a few things that I like about the company:

  • Dividend yield  with current price ($75.05) stands at 4.49% which is much higher than average yield in Utility – Electric Power industry (2.9%);
  • Company kept increasing their dividend for 16 years in a row and the last raise (in December 2018) was ~10%;
  • Company recently completed acquisition of Scana. Actually, I am not sure if this is an advantage or a drawback. It should increase their earnings but it comes with a cost as well. To complete the merger, company had to cut electricity rates for their customers. Also, it accumulated some debt in the process. Anyway, I think it’s going to be a good move in the long run.

Let’s also try to find some negatives:

  • Company’s price is close to 52-week high ($77.19). I usually like to purchase some beaten down companies and it doesn’t look to be the case for Dominion at the moment;
  • Dividend payout ratio is quite high. At Finviz it says that it stands at 70.5% but it looks like it doesn’t include the latest raise. It should be even higher after the raise. I usually like to see the ratio below 60% but it’s quite normal for the payout ratio to be higher for Utility companies;
  • Debt/Equity ratio stands at 2.07 which is higher than what I like to see. On the other hand, it operates in a field with constant revenues, so it shouldn’t be a problem for the company.

Consolidated Edison (ED)

Next up is a dividend champion. Consolidated Edison raised their dividend for 45 years in a row (including last raise in January)! I already own a few dividend champions in my portfolio, and it would feel good to add another solid company to my portfolio.

Shortly about ED:

Consolidated Edison, Inc., commonly known as Con Edison or Con Ed, is one of the largest investor-owned energy companies in the United States, with approximately $12 billion in annual revenues as of 2017, and over $48 billion in assets. The company provides a wide range of energy-related products and services to its customers through its subsidiaries. Founded in 1823 as the New York Gas Light company, our electric, gas, and steam service now provides energy for the 10 million people who live in New York City and Westchester County.

Let’s also try to find some advantages and drawbacks about the company. Starting with the things I like:

  • Dividend yield of 3.7% is higher than average in the industry;
  • As I mentioned, it raised dividends for 45 years in a row which makes it a dividend champion;
  • Dividend payout ratio stands at 56.6% which falls into my preferred range of 40-60%. It is bound to become higher after the latest dividend raise and decline in net income, though;
  • Cash and temporary cash investments increased from $797 million in December 2017 to $895 million as of Dec 31, 2018.

Things that I don’t like that much:

  • It is trading at a price close to 52-week high ($82.10);
  • Earnings per share were lower in 2018 compared to 2017;
  • Long-term debt was $17,495 million as of Dec 31, 2018, compared with $14,731 million at 2017 end;
  • Dividend growth is quite slow recently. 5-yr average growth rate stands at 2.7% at the moment.

Southern Company (SO)

The last company in the list is an energy giant which is quite a common holding in portfolios of dividend investors.

Shortly about the company:

Southern Company (NYSE: SO) is America’s premier energy company, with 46,000 MW of generating capacity and 1,500 billion cubic feet of combined natural gas consumption and throughput volume serving 9 million customers through its subsidiaries. Operations include nearly 200,000 miles of electric transmission and distribution lines and more than 80,000 miles of natural gas pipeline.

I will continue the theme and try to list attractions and drawbacks of the company at its current price. Let’s start with the good things:

  • Dividend yield is currently 4.78%;
  • SO raised their dividend for 17 years in a row.

These are the drawbacks:

  • P/E ratio (for trailing twelve months) is quite high at 23;
  • Just like the previous two companies, it is trading at 52-week high at the moment;
  • Dividend payout ratio is more than 100% of earnings per share (109%). They should still be able to maintain their dividend but the growth rate will probably be very slow going forward.

Comparison & Summary

I also made a table with comparison of ratios that look important to me when choosing a company to invest to:

As we can see from the table, D & SO are quite similar with their ratios. They are providing higher yield but also have higher payout ratio and more debt. On the contrary, yield of ED is lower but its dividend seems to be safer for future raises. It also has lower debt levels. If I had to choose one company from the three mentioned, I would probably go with Dominion. I think it has the most potential in the group.

To conclude, I think I am going to wait for better valuations. Prices of most of the Utility companies increased recently and perhaps it is not the best time to enter this industry. I will need to give it more consideration or try to find another company which would look more attractive at the moment.

Do you have any Utility companies in your portfolio? What would be your choice now? I would love to read your comments!

 

Photo by Fré Sonneveld on Unsplash

8 thoughts on “February 2019 Watchlist (Utilities)

    1. Hi P2035,
      Thanks for the comment. ED would be my 2nd choice if I had to rate the 3 companies I mentioned but it definitely has some advantages over the other two as well 🙂

  1. I only have Canadian utility companies in my portfolio at the moment (FTS.TO and CU.TO). Both of these companies have been increasing dividends for over a forty years in a row, which is a huge accomplishment in my opinion. I wouldn’t mind purchasing a third stock from the utilities sector later this year – maybe one of these three!

    1. Thanks for sharing Dividend Deluge. I am not familiar with the companies you mentioned but will defibitely have a look at them!

  2. Nice list, BI!
    Of these three, I’m invested in D since beginning of 2019. It is my one and only utility so far. However I’m open for other candidates, too. Didn’t realize that ED has such a long track record of dividend increases. Impressive!
    -SF

    1. Thanks for the comment SF. I think D is a good choice and I guess the price climbed in value since you purchased them. I would love to have them but don’t want to buy them at the current price. Will probably try to wait for a dip 🙂

  3. I’ve been looking at this sector recently as well, but haven’t made any purchases as of yet. I’ve really wanted to add to my current position in NEE but they are over-valued as well. The three you mention here have been part of my considerations, and I like the valuation on D the best of these three right now but would like to see all of them a bit lower before adding.

    1. Hi DivvyDad,
      The same here. I decided to employ my capital in another sector for now (will publish a separate post shortly). I will try to wait for better valuations to initiate a position in some Utility sector 🙂

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