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Summary The company has a very stable business model. Decreasing operating income is not reflective of its core operations. Operating cash flow is sufficient to cover distributions. CenterPoint Energy (NYSE: CNP ) is an utility company in the U.S. It primarily operates electric and natural gas infrastructure used for transmission or distribution. The business model is just perfect for a dividend stock, as consumer demand for energy is fairly inelastic. People will use electricity regardless of the price or economic environment. Despite the stability of the underlying business, the company is currently yielding 5%. Let’s examine how the company measures up to our expectations. The company does not engage in direct retail or wholesale sales of electric energy nor does it have any electricity generation activity, meaning that it is mostly shielded from price fluctuations. The company’s natural gas distribution business on the other hand does sell the commodity to residential and commercial consumers. There is a lag between when the company purchases natural gas from suppliers and when the sales to consumers happen. However, the exposure is hedged with derivative instruments, dramatically lowering the impact of commodity fluctuations on the company’s profitability. Given the above factors, you may be surprised to learn that the company’s operating profit actually decreased from 2012, from $1 billion to $935 million in 2014. However, this is due a reclassification of income related to the subsidiary Enable, which operates various midstream assets for crude and natural gas. This provided an extra $421 million in 2012, which led to the inflation of operating income. If we look at the company’s core operations (Electric Transmission & Distribution and Natural Gas Distribution), we’ll find that the profits have been very stable. The combined operating profit for the two main segments were $865 million in 2012, $870 million in 2013, and $882 million in 2014. These metrics reflect our earlier opinion about the company’s stability. The company has a history of positive operating cash flow. After accounting for working capital changes, the company’s operating cash flow did not change significantly from two year ago ($1.76 billion in 2014 vs $1.79 billion in 2012). This is much higher than the annual dividend payment of around $400 million. Operating cash flow generated in the first quarter amply covers the quarterly distribution as well ($666 million vs $106 million). I talk about capital expenditure a lot in my articles because it is critical to dividend investors. If a company invests too much and can’t (or doesn’t want to) take on more equity or debt, the management often resorts to decreasing dividends. But you have to distinguish between growth capital expenditure and maintenance capital expenditure. For CenterPoint, the capital expenditure on the surface is very high ($1.4 billion in 2014), but it far exceeds the company’s depreciation expense, which was only $521 million in 2014). This means that the company is growing the asset base to generate more profits in the future. If the company decides to stop expanding, it would only need to spend enough money to cover the depreciation expense to maintain the assets’ productive capacity. This means that it could potentially cut capital expenditure by $900 million and still maintain the current level of profits and distribution. Conclusion CenterPoint Energy is a good company with a business model that will provide steady cash flows. Its electricity segment is shielded from commodity fluctuations while its exposure to natural gas is hedged using derivatives, preserving the overall stability of the business. If you are looking for a safe investment with a 5% yield, then CenterPoint Energy is definitely something to think about. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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