5 Utility Stocks To Keep In 2012

By Frank Curtin

Utility companies are generally considered a safe investment. The companies are natural monopolies but their earnings (rate of return) are predetermined by regulatory agencies. This limits their profits on one hand but (depending on the regulatory agency) guarantees a profit on the other. Utility growth prospects are tied directly to gross domestic product, demographics and their ability to expand through mergers, partnerships and acquisitions. Although the stock of these companies generally don't demonstrate much in the way of capital appreciation, the companies are renowned for paying high dividends. In this article, I will provide analysis on five utility stocks which all have a strong history of paying out hefty dividends. I chose these five stocks for this article because they are all in an excellent position to continue yielding high dividends throughout 2012.

Xcel Energy (XEL): Xcel Energy provides eight mid-western states with electricity and natural gas services. The company owns and operates about 35,000 miles of natural gas pipelines, manufactures wind turbines and invests strongly in wind energy. The stock is in an established upward trend although it is coming off its 52 week high quite significantly and has been known to be somewhat volatile. In addition to this capital appreciation the company pays out a dividend of $1.04 per share (on an annual basis) that produces a dividend yield of 3.9% at the stock's current price. The dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is in line with the industry average of 60%, coming in at 60%. In the company's latest earnings report, operating income came in a penny short but margins were expanding due to some rate increases in areas where the company supplies power. The company also beat earnings per share by $.03. The company's two main competitors in this market are Allete, Inc. (ALE) with a PEG ratio of 3.43 and American Electric Power Company (AEP) with a PEG ratio of 3.10. Xcel Energy is the cheaper of the trio in terms of growth with a PEG ratio of 2.89.

Northeast Utilities (NU): Northeast Utilities is presently the largest utility company in the New England states - supplying electricity to all of New Hampshire, Connecticut and Western Massachusetts. The company generates some of its own electricity and also offers natural gas services. The stock has been bouncing around over the past 12 months in a range between $30 and $37 per share. However, Northeast Utilities does pay out a dividend of $1.10 per share with a dividend yield of 3.1% at the stock's current price. The dividend is paid out and raised on a consistent basis and the payout ratio (trailing twelve months) is 43%, well below the sector average of 59%. In recent news, Connecticut utility regulators reversed a decision not to consider approval of the planned merger between Northeast Utilities and Nstar (NST), citing recent storms that left thousands of the state's residents without power. If the merger goes through it, I believe it will amplify the competitive advantage Northeast Utilities already holds due to its size, and in the process, increase the company's overall revenue stream to points where dividends will be significantly increased over the next 10 years. The company's closest publicly held competitor in this market is NiSource Inc (NI), with a five year expected PEG ratio of 1.91. Northeast Utilities is slightly more expensive with a five year expected PEG ratio of 2.46.

Pepco Holdings (POM): Pepco Holdings generates and distributes electricity to customers in the Maryland and Washington, D.C., areas. The company is also under a $5 billion contract from the U.S. Department of Energy to design and construct new cost saving projects for government facilities. The Department of Energy expects these projects to generate enough savings over the term of the contract to pay for itself. In my opinion, anything the government can do to provide cost savings is a good thing. This sets a good example to the general public, as energy conservation may become a necessity in the not too distant future. The project also puts Pepco Holdings in the forefront of other smart grid projects in the pipeline which can only be beneficial to the company. Pepco Holdings pays out a dividend of $1.08 per share with a dividend yield of 5.4% at the stock's current price. The dividend is paid out on a consistent basis. With a payout ratio (trailing twelve months) of 91% of revenues, well above the sector average of 60%, the dividend cannot be raised much further. The company's two main competitors in this market are Constellation Energy Group, Inc (CEG), with a PEG ratio of 3.41, and American Electric Power Company, with a PEG ratio of 3.10. Pepco Holdings is a little pricy by comparison with a PEG ratio of 4.04.

Hawaiian Electric Industries (HE): Hawaiian Electric Industries is quite unique in this segment as the company not only generates and transmits electricity to 95% of Hawaii's population, it is also the third largest commercial bank in the state. The company also has banking and insurance operations in Guam. In my opinion, this is not an example of a well diversified company. It is just a splitting of the company's assets into two segments, a strategy that has backfired in recent years as both segments have suffered downturns. The company's stock has been range bound between $21 and $27 per share over the past 12 months but has been trading in the upper quartile of this range for the past three months. Hawaiian Electric Industries does however pay out a dividend of $1.24 per share (annualized) with a dividend yield of 4.7% at the stock's current price. The dividend is paid out on a consistent basis but was cut by 50% in 2004. With a payout ratio (trailing twelve months) of 93% of revenues, well above the sector average of 60%, the dividend cannot be raised much further. The company's two main competitors in this sector are AES Corporation (AES), with a PEG ratio of 1.61, and Constellation Energy Group, Inc, with a PEG ratio of 3.41. Hawaiian Electric Industries is moderately priced in comparison with a PEG ratio of 1.90.

IDACORP (IDA): IDACORP is a utility company with operations in Idaho and eastern Oregon. The company's main source of electricity generation is from hydroelectric power, and although this insulates it from rising costs in oil, natural gas and coal, it makes the company more susceptible to drought conditions. The stock itself is in an established upward trend that is hitting new 52-week highs on a daily basis. In addition to capital appreciation, the company pays out a dividend of $1.32 per share (on an annual basis) that produces a dividend yield of 3.1% at the stock's current price. The dividend is paid out on a consistent basis and the payout ratio (trailing twelve months) is well below the industry average of 60%, coming in at 34%. The company has recently raised this dividend for the first time since 2003, moving it closer to the company's target payout ratio of between 50% and 60% of sustainable earnings. The company's two main competitors in this sector are Avista Corporation (AVA) and Portland General Electric (POR). Avista Corporation currently has a PEG ratio of 3.16, while Portland General Electric currently has a PEG ratio of 2.50. IDACORP is slightly cheaper in comparison with a PEG ratio of 2.48.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.