Seek Yield From the Right Utilities

by Lawrence Meyers | October 26, 2012 11:20 am

Utilities are a great concept. What could be better than buying into a business that’s essentially a regional monopoly, with rates set by the government, giving you a pretty good idea what kind of revenue to expect? One just needs to choose carefully because utilities have had a nice run and yields have dropped a bit

Still, some solid utility plays are still out there. My favorite right now is National Grid (NYSE:NGG[1]). The company operates high-voltage electricity transmission networks and gas transmission (and distribution) networks in the U.K., New York and New England. It also has electricity generation facilities in New York and liquefied natural gas storage facilities in the U.K.

And it owns electricity interconnectors in France and the Netherlands, and a 224-kilometer transmission interconnector between the U.K. and Canada. In addition, it owns 57 oil- and gas-fired electricity generation units on Long Island that provide approximately 4.1 GW of power and 4.6-MW unit of solar generation in Massachusetts.

How’s that for a diversified utility? The company has solid cash flow, although it’s been a bit erratic over the past few years, bouncing from $2.3 billion in fiscal 2010 to $3 billion in FY11, to $1.7 billion in fiscal 2012. Net margins run 15%.

As for that all-important yield, it pays a whopping 7.2%. The debt load is of some concern because National Grid carries $34 billion in long-term debt and is paying a hefty 10% interest on it. It’s not a major concern given the company’s $5 billion in cash and investments and its cash flow, and I don’t see a dividend cut happening. NGG has raised its dividend every year since 1993.

Northwestern (NYSE:NWE[2]) provides electricity and natural gas in Montana, South Dakora and Nebraska. It serves about 668,000 customers and has been around for 90 years. It’s small by most standards, but that’s a good thing because it can be easily overlooked and gives you chance for appreciation in addition to its 4.2% dividend.

Duke Energy (NYSE:DUK[3]) is the other big name. Its Electric and Gas segment generates, transmits, distributes and sells electricity in central and western North Carolina; western South Carolina; central and southwestern Ohio; north central and southern Indiana; and northern Kentucky. It also transports and sells natural gas. This segment supplies electric service to 4 million customers.

Duke’s Commercial Power segment owns, operates and manages power plants, and it engages in the wholesale marketing and procurement of electric power, fuel and emission allowances related to plants. This segment also retails electricity to customers in southwest, west central and northern Ohio.

The International Energy segment operates and manages power-generation facilities. Again, I love the diversification and the 4.7% yield.

American Electric Power (NYSE:AEP[4]) pays 4.2%, and First Energy (NYSE:FE[5]) pays 4.8%. Edison International (NYSE:EIX[6]) pays out 2.8%. All have a lot of debt, and their cash flow isn’t fantastic. Rising interest rates could hit these companies, but since nobody foresees rates rising for awhile, they’re safe for now.

If you want the yield but are skittish about picking an individual utility, go with iShares S&P Global Utilties (NYSE:JXI[7]). Here you get utilities from all over the world, offering diversification in case something goes wrong with one or two of them. The ETF pays a 4.31% yield.

As of this writing, Lawrence Meyers doesn’t own shares in any company mentioned here.

Endnotes:
  1. NGG: http://studio-5.financialcontent.com/investplace/quote?Symbol=NGG
  2. NWE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NWE
  3. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  4. AEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEP
  5. FE: http://studio-5.financialcontent.com/investplace/quote?Symbol=FE
  6. EIX: http://studio-5.financialcontent.com/investplace/quote?Symbol=EIX
  7. JXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=JXI

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