Published Wed, 16 Oct 2013 10:30 CET by TopYields.nl
Utilities as a sector have been the biggest laggards so far this year, posting a 10% total return for the year through September 30, 2013. Rising yields on government bonds, symbolizing the prevalent fear of rising interest rates in the near term, are partly to blame for that lackluster performance. However, despite their weak performance relative to other sectors, utility stocks may look appealing for dividend investors in a still-volatile macroeconomic environment. Generally, utility stocks pay competitive dividend yields and are considered the least sensitive to economic cycles. Hence, they are viewed as defensive plays with lower volatility of returns than broad market benchmarks. For this reason, high-quality, high-yielding utility stocks should still be researched as potential investments, particularly by dividend investors building conservative portfolios that include defensive utility plays.
While there are many high-yielding utility stocks, only a few boast remarkable growth, consistence and stability of earnings and dividends. Among the constituents of the S&P 500 High Quality Rankings Index, including some 130 members of the renowned S&P 500 index, there is a total of six high-quality utility stocks, out of which four are stocks with yields of at least 4.0%. The constituent utility stocks have demonstrated long-term growth and stability of earnings and dividends, evaluated based on the earnings rate of growth, stability within long-term trends, and cyclicality. The following table presents the main profiles and dividend characteristics of the four noted high-quality dividend-paying utility stocks with yields of at least 4.0%. The other two utility stocks included in the S&P 500 High Quality Rankings Index but yielding below the 4.0% threshold include NextEra Energy (NYSE: NEE) and Wisconsin Energy (NYSE: WEC).
Among the featured stocks, Entergy (NYSE: ETR), an electric utility company that celebrates a centennial this year, pays the highest dividend yield. In fact, Entergy is one of the highest-yielding constituents of the S&P 500 with dividend payments per share that do not exceed the company's earnings per share (EPS). At the same time, it also has the lowest forward valuation of the noted stocks – which, given its stability profile and dividend yield, makes it appealing based on valuation. SCANA (NYSE: SCG), an electric (diversified) utility, has the lowest dividend payout ratio, followed by Entergy. Southern (NYSE: SO), ranked by Electric Light & Power magazine the “No. 1 Electric Utility in North America,” offers a high dividend yield with a superb record of dividend sustainability and growth. It has paid dividends for some 65 years now and has raised them in 58 out of the past 62 years. SCANA has been in operations for more than 160 years and has raised dividends consistently for 13 consecutive years. AGL Resources (NYSE: GAS), an energy services holding company operating mainly as a gas distributor, has been paying dividends since 1939, and has raised them for 11 consecutive years now. All these stocks except for Entergy are constituents of the Nasdaq Broad Dividend Achievers Index, which comprises of stocks with at least 10 years of consecutive dividend increases.
AGL Resources is an energy services holding company providing gas distribution to some 4.5 million customers across seven U.S. States, with the majority of customers in Illinois and Georgia. It also has midstream operations and a cargo shipping services business. Still, distribution and retail operations account for some 97% of its EBIT (according to 2012 financials). The company's management has shown commitment to dividend growth, exemplified by a strong track record of regular dividend increases. While the company targets five-year net income CAGR of between 4.0% and 6.0% per year, with a rate base growth of about 4.0%, its long-term annual dividend growth target is set at between 2.0% and 2.5%. The company is committed to “increasing dividend on a consistent basis, based upon sustainable cash flows primarily from distribution and retail businesses.”
Entergy utilities provide electric power to 2.8 million customers in four states, including Arkansas, Mississippi, Texas, and Louisiana, with the City of New Orleans, as well as natural gas distribution to some 194,000 customers in the New Orleans and Baton Rouge, La. areas. In its five-year financial outlook for the period from 2010 through 2014, the company included deploying $4 billion to shareholders through dividends and share repurchases. However, as the company is in the process of spinning off its electric transmission business and merging it into an ITC Holdings Corp. (NYSE: ITC) subsidiary, Entergy's dividend policy may change in the future. Still, the company's “objective remains that the combination of the Entergy and ITC dividends, which will be paid to all Entergy shareholders after transaction close, be accretive to the current Entergy dividend.”
SCANA's beginning dates back to 1846. Today, the company's primary operations include regulated electric and natural gas utility operations. It serves some 670,000 electric power customers and provides natural gas to some 819,600 customers in North Carolina and South Carolina. It also markets natural gas to 450,000 customers in Georgia. The company operates in a favorable regulatory environment, which is a factor that grants stability to the company's cash flow and dividends. The stock is also known for its low volatility of returns and beta. The stock is widely held by insiders, as SCANA's employees own 11% of the outstanding common stock. The company targets annual EPS growth of between 3% and 6% in the next three-to-five year period. However, given that SCANA's target dividend payout ratio is between 55% and 60% –with the current ratio at the top of the range– a high dividend growth rate in the medium term should not be expected.
Southern serves some 4.4 million customers in the southeastern United States. The company is considered the “only electric utility in the U.S. committed to a full portfolio of new nuclear, 21st century coal gasification, natural gas, solar and biomass.” As an investment, historically, it has proven to be lucrative, given it has outperformed the S&P 500 Index for total return in 5-year, 10-year and 30-year periods ended December 31, 2012. The stock also has a long history of consistent dividend payouts and growth, and is characterized by a very low beta of only 0.03. Southern Co.'s stock is priced close to the average valuation of its peers; however, its price-to-book is higher than the industry average. Analysts forecast its five-year EPS CAGR of 4.28%, which is below the analysts' consensus average EPS CAGR of 5.15% for the industry. Still, while high rates of dividend growth should not be expected from Southern Co., the stock's current yield looks appealing.
The aforementioned four utility stocks stand out due to their earnings and dividends stability and consistency over different economic cycles. Moreover, they all boast attractive dividend yields. As such, they could serve as a basis for further research of high-yield utility stocks characterized by long-term earnings and dividend consistency.
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