If you’re in the market for solid, conservative stocks that will deliver consistent performance for the long haul, electric utilities are a great bet. And as an added benefit, they usually deliver great dividend yields.
But if utilities are such safe and sleepy stocks, why does one market analyst believe earnings of the right companies could jump by 11% this year alone?
FBR Capital Markets analyst Mark de Croisset predicted in a research note on Tuesday that shares of so-called integrated utilities, those that wholesale electricity to other power companies, will skyrocket as growing demand, tougher regulations and rising fuel costs allow them to hike rates. Because large-cap integrated utilities have an easier time passing on costs to wholesale customers, they usually have a lot of available cash and comparatively lower debt loads.
The conventional wisdom about utility stocks is that you don’t buy them for growth potential (which is subdued compared to stocks in hotter – and riskier — sectors like technology). That makes utilities the perfect option for income investors.
But integrated utilities may offer conservative investors the perfect blend of income and growth. Some stocks are a better bet than others, but here are four names that deserve a closer look:
1. FirstEnergy (NYSE:FE). FirstEnergy, which has a market cap of $17.9 billion, serves some 4.5 million customers through eight utilities in Ohio, New Jersey and Pennsylvania. At $42.78, the stock is trading nearly 24% above its 52-week low last July. The stock has a 5.1% dividend yield. The company recently acquired Pennsylvania-based Allegheny Energy for $4.4 billion, a move that expands its rate base and geographic reach.
2. Progress Energy (NYSE:PGN). Progress serves about 3.1 million customers in the Carolinas and Florida. At $43.73, the stock is trading nearly 20% above its 52-week low last July. The stock has a 5.3% dividend yield. Earlier this month, Progress Energy Carolinas filed for a 3.7% rate increase to recover increased fuel costs and energy efficient and renewable programs.
3. Entergy (NYSE:ETR). Entergy generates, transmits, and wholesales electricity in Mississippi, Arkansas, Texas and Louisiana. At $68.39, the stock is trading at about 15% below its 52-week high of $80.80 last September. The stock has a 4.8% dividend yield. The company is in a legal squabble with the states of Vermont and Massachusetts over the license renewal for its Vermont Yankee nuclear plant. The Nuclear Regulatory Commission approved the renewal, but the states are balking in the wake of the Japanese nuclear disaster. Vermont Yankee employs the same reactor as the crippled GE boiling water units at the Fukushima I plant.
4. Dominion Resources (NYSE:D). Dominion produces and transports electricity for retail energy customers in 15 states. Dominion hit a new 52-week high of $48.17 last week and is trading 22% above its 52-week low last July. The stock has a 4.1% dividend yield. In May, Dominion petitioned Virginia regulators for a 4.8% rate increase.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
