Best S&P 500 Utility Stocks According To Zweig Principles: Consider Ameren Corporation
Summary Ranking the top 20 S&P 500 utility stocks according to “All-Stars: Zweig” ranking system. Explanation and back-testing of the “All-Stars: Zweig” ranking system. Description and a buy recommendation for the first-ranked stock of the system: Ameren Corporation. S&P 500 utility stocks have underperformed on average the S&P 500 index over the last year. The average return of the 29 S&P 500 utility stocks that are included in the S&P 500 index (included dividends) in the last 52 weeks has been only 0.18% while the S&P 500 index has returned 2.96%. The table below shows all S&P 500 utility companies, ranked according to their 52-week return. (click to enlarge) On one previous article from September 15, 2014, I described the “All-Stars: Zweig” ranking system. However, in this article, I updated the backtesting of the system and ran it on another group of stocks. The “All-Stars: Zweig” ranking system is quite complex, and it is taking into account many factors like EPS Growth, Sales Growth, Market Performance and Insiders activity, as shown in the Portfolio123’s chart below. To find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available through the Portfolio123 ‘s screener. For the back-test, I took all the 6,555 stocks in the Portfolio123’s database. The back-test results are shown in the chart below. For the back-test, I divided the 6,555 companies into 20 groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “All-Stars: Zweig” rank. The highest-ranked group with the ranking score of 95-100, which is shown in the light blue column in the chart, has given the best return – an average annual return of about 17%, while the average annual return of the S&P 500 index during the same period was about 3.2% (the red column at the left part of the chart). Also, the second, the third group, and the fourth group (scored: 90-95, 85-90, and 80-85) have yielded superior returns. This brings me to the conclusion that the ranking system is very useful. After running the “All-Stars: Zweig” ranking system on all S&P 500 utility stocks on November 24, I discovered the 20 best stocks, which are shown in the table below. In this article, I will focus on the first stock of the list: Ameren Corporation (NYSE: AEE ). (click to enlarge) Company Description St. Louis-based Ameren Corporation powers 2.4 million electric customers and more than 900,000 natural gas customers in a 64,000-square-mile area through its Ameren Missouri and Ameren Illinois rate-regulated utility subsidiaries. Ameren Illinois provides electric delivery and transmission service as well as natural gas delivery service while Ameren Missouri provides vertically integrated electric service, with generating capacity of over 10,200 megawatts, and natural gas delivery service. Ameren Transmission Company of Illinois develops regional electric transmission projects. In 2014, the company generated 61% of its electricity from coal, 16% from its Callaway nuclear plant, 2% from hydro sources, 1% from gas, and 20% from outside purchases. (click to enlarge) Source: Edison Electric Institute Financial Conference On November 06, Ameren Corporation reported strong third quarter 2015 financial results, which beat EPS expectations by a big margin of $0.11 (8.5%) and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters, as shown in the table below. Data: Yahoo Finance Ameren announced net income attributable to common stockholders of $343 million, or $1.41 per diluted share, for the third quarter of 2015, compared with $293 million, or $1.20 per diluted share, for the third quarter of 2014. The year-over-year increase in third quarter 2015 earnings reflected higher retail electric sales volumes driven by warmer summer temperatures that were near normal. The comparison also was favorably affected by earnings on increased investments in electric transmission and delivery infrastructure made under formula ratemaking. In addition, earnings benefited from a seasonal rate redesign and the timing of revenues under formula ratemaking for Ameren Illinois’ electric delivery service as well as a lower effective income tax rate. In the report, Warner L. Baxter, chairman, president and chief executive officer of Ameren, said: We are on track to deliver strong earnings growth in 2015. This growth is driven by the execution of our strategy, which includes allocating capital to jurisdictions with modern, constructive regulatory frameworks and managing our costs in a disciplined manner for the benefit of all our stakeholders. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The formulaic Illinois rate structure is constructive, and with increased capital expenditures in the Illinois utility, rates will increase further. The company is waiting for rulings from the Illinois Commerce Commission about an electric delivery formula rate increase along with a natural gas delivery rate case that would raise rates. A decision in these cases is expected in December. The company is experiencing a more favorable regulatory climate at the state level than in the recent past, and, under a Federal Energy Regulatory Commission formula rate plan, is benefiting from returns on its transmission buildout program, which are usually higher than the returns earned on electricity generating and distribution assets. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation. Valuation Year to date, AEE’s stock is down 6.0% while the S&P 500 Index has increased 1.3%, and the NASDAQ Composite Index has gained 7.7%. Moreover, since the beginning of 2012, AEE has gained only 30.8%. In this period, the S&P 500 Index has increased 65.9%, and the Nasdaq Composite Index has risen 95.9%. AEE Daily Chart (click to enlarge) AEE Weekly Chart (click to enlarge) Charts: TradeStation Group, Inc. Ameren’s valuation is fairly good. The trailing P/E is at 16.25, and the forward P/E is at 15.93. The price to book value is at 1.53, and the Enterprise Value/EBITDA ratio is low at 8.32. On October 09, the company declared a quarterly cash dividend on its common stock of 42.5 cents per share, a 3.7% increase from the prior quarterly cash dividend of 41 cents per share, resulting in an annualized equivalent dividend rate of $1.70 per share. The previous annualized equivalent dividend rate was $1.64 per share. The forward annual dividend yield is pretty high at 3.92%, and the payout ratio at 61.2%. The annual rate of dividend growth over the past three years was at 1.2%, and over the past five years was at 0.9%. Ameren expects the dividend payout ratio to be between 55% and 70% of annual earnings. AEE Dividend data by YCharts Summary Ameren delivered strong third quarter 2015 financial results, which beat EPS expectations by a big margin and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The company recently raised its dividend by 3.7% to a new annual rate of $1.70 per share. The forward annual dividend yield is pretty high at 3.92%. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation, and its stock is an investment opportunity right now.