I was going through my portfolio recently and noticed that I don’t have any companies from the Utility sector. Even though utility companies are usually not fast-growing, their stability may also be a good thing. This is especially useful during the bad times. We are already seeing some turbulence in US stocks recently so it would be good to own some stocks that would stay stable during recessions.
Since I am not that familiar with Utility sector stocks in U.S., I decided to start with checking what is available in my local market which covers Lithuania, Latvia and Estonia. I would also experience lower taxes on dividends here and that’s always a big plus.
So I started looking for Utility stocks that are available in our local Baltic market and found 6 companies:
- Energijos Skirstymo Operatorius (ESO1L);
- Lietuvos Energijos Gamyba (LNR1L);
- Tallinna Vessi (TVEAT);
- Kauno Energija (KNR1L);
- Latvijas Gaze (GZE1R);
- Litgrid (LGD1L).
Let’s see how they compare by using some of the ratios that look important to me when looking for potential additions to my portfolio:
One thing that I am usually checking is actually missing from the above table. It’s dividend growth rate and how many years each company is raising their dividend. The reason is simple – these companies are not known for consistently raising their dividends, unfortunately. None of them raised their dividends for more than 3 years recently, unfortunately. This makes them not so attractive for dividend growth investors and makes me wonder if I should better investigate what is available in foreign markets.
If I had to choose from the above list, though, I would choose between two that have the most green color in the table I made – ESO1L and KNR1L.
I had a look at their most recent reports to see how promising they look at the moment.
Energijos Skirstymo Operatorius (ESO1L)
Energijos Skirstymo Operatorius AB is engaged in supply and distribution of electricity, natural gas distribution, guarantee the supply of electricity and natural gas, introduction of electricity and gas, maintenance and development of electricity and gas distribution networks ensuring their safety and reliability. The company has two operating segments that are Electricity supply and distribution and Gas distribution. Geographically it is based in the Republic of Lithuania, where the majority of its revenue is generated from electricity supply and distribution.
Company fundamentals look pretty good when looking at the ratios in the above table. However, this is based on their 2017 results. When checking company’s latest 6-month report for 2018 I can see quite a lot of negatives:
- While revenue remained stable (+0.4%), Net Profit fell by 61.4%. Main reason for that was 26.8% higher wholesale electricity price on the “Nord Pool” electricity exchange;
- Net financial debt increased by 24.3% (from 366.2M EUR to 455.2M EUR);
- Investment increased by 53.4% during the period (from 74.1M EUR to 113.7M EUR). While this should be good for the company in the long run, it should reduce the free cash flow of the company.
Those three points make me think that the company will reduce their dividend in 2019. Furthermore, even though ESO is the largest company by market capitalization on NASDAQ Baltic Exchange (760.44M EUR), it is not very liquid. 94.8% of the shares are held by “Lietuvos Energija”, UAB holding which is controlled by the finance ministry of the Republic of Lithuania.
This leads to a conclusion that I am not going to initiate a position in ESO1L in the nearest future. I will keep an eye on it next year, though, as it may present a good entry point in the future if the price decreases.
Kauno Energija (KNR1L)
Kauno Energija AB is a Lithuania based company engaged in heat and hot water supplies in the cities of Kaunas and Jurbarkas and in Kaunas district, Lithuania. In addition, the company is also involved in electricity generation and distribution. The company carries out supervision of indoor heat and hot water supply systems, repair and maintenance of heat unit equipment, provides rental services premises.
This is a much smaller company with 44.51M EUR market capitalization. It is also not a liquid company with 92.84% of the shares held by Municipality of Kaunas city, 3.75% – by Kaunas district Municipality and 1.74% – by Jurbarkas district Municipality. This only leaves 1.67% of the shares freely floating so I am not even sure if I could find some sellers if I wanted to purchase some shares and then find buyers if I decided to sell them. Stock turnover in 2017 was only 190k EUR which is really small amount.
If the company maintained their dividend next year, it would yield impressive 7.69% with their current price. To figure out if it can be maintained, I turned to their most recent half-year report available. Here as some key points I was able to find out:
- Total Liabilities decreased by 7.5% (from 59M EUR to 55M EUR) while Total Current Liabilities decreased by 43% (from 15.7M EUR to 8.9M EUR);
- Net Profit decreased by 10.5% (from 6.16M EUR to 5.51M EUR) while Revenue increased by 7.9% (from 36M EUR to 39M EUR);
- Cash and Cash Equivalents (compared to the same period last year) increased by 25% (from 10.98M EUR to 13.76M EUR).
This suggests that the company should be able to maintain their dividend. But you cannot be certain. When looking at historic data and dividends, the payouts look sporadic. Also, as I mentioned earlier, the investment would not be liquid. The fact that 98% of the shares are held by local municipalities also doesn’t convince me that return to shareholders would be an important thing for the company.
After a brief overview of Utility companies in Baltic Exchange, none of the companies looks attractive enough to invest to at the moment. I guess I will need to look for opportunities outside my local market.
Question: Do you own any companies from the Utility sector? Have you purchased anything from this sector recently? What would be your choice at the moment? I would appreciate any comments!