Tag Archives: alternative

Southwest Gas Corporation Is Dependent On The Construction Business

Summary After years of performance, the stock slumped in 2015. Investors didn’t like Q3 results due to poor outlook for the natural gas division. The construction segment has a secular tailwind at its back, but there is no telling when it will go away. Southwest Gas Corporation (NYSE: SWX ) is a utility company that specializes in natural gas distribution and construction. It’s primarily services customers in Arizona, Nevada, and California. The company is the largest distributor in Arizona and Nevada. With its scale and the relative stability of the utility business, the stock has steadily climbed throughout the years. In 2015 however, the stock has hit a bump. Year to date, shares have fallen by 10% from $61.81 to $55.70. The Business Let’s first talk about the natural gas division. It consists of the company’s distribution and transportation business. The majority of customers is made up of residential and small commercial customers, which accounted for 85% of the company’s operating margin (defined by the company as operating revenue minus the cost of gas, which is more similar to gross margin) in 2014. The other 15% is broken down into two parts: 4% from other customers and 11% from transportation. The transportation segment acts like a midstream company, transporting gas that is sourced by the customer instead of Southwest. Interestingly, although transportation only accounts for a tenth of overall operating margin, it does occupy a significantly larger portion of total system throughput. Transportation accounted for almost half of the total throughput in 2013 and 2014. This discrepancy between transportation margin and the capacity occupied by the transportation segment shows that the company can improve profitability if it can shift more of its business to distribution, which earns much higher profits. The other half of the business is the construction division. This segment’s main focus is on energy distribution related systems, so it acts as a complement to the distribution and transportation business. A typical project could be as small as maintenance or as big as piping the entire community, for that reason, earnings could be quite lumpy. Recent Performance It would appear that the market didn’t like the company’s Q3 results. After releasing earnings on November 4th, the stock has declined by 9% in a matter of weeks. Both segments continued to grow. While natural gas operations’ revenue declined from $226 million to $219 million, this was the result of lower gas prices in general. After subtracting the cost of gas, the natural gas segment’s operating margin increased from $153 million to $155 million. However, it should be noted that the company is not expecting growth in the natural gas division in the near future. The management stated during the Q3 earnings call that they believe future margin increases will be offset by higher expenses. The construction segment experienced higher growth, increase revenue from $206 million to $286 million. Can you count on the construction segment to hold up? Recently the segment benefited from higher demand for pipe replacement projects as the result of regulatory pressure by the U.S. Department of Transportation to enhance safety. While projects may continue to ramp up in the short-term, I don’t think that the construction segment can continue to perform at the current level over the long-term. Conclusion In the near-term, I believe that the stock can only recover if the construction segment continues to perform well. Because the outlook for natural gas operation is not great (i.e. no growth), the only way that the company can create value is by winning more contracts through the construction segment. The aforementioned secular trend of increasing regulatory pressure could help, but there is no telling when the increase in demand will fade away.

Forget Dividend Growth Investing: I Want My Dividends And I Want Them Now

Summary In a previous article, I featured the Vanguard Dividend Appreciation ETF, and my reasons for including it in my personal portfolio. In this article, I feature a different ETF, one that you may select if you wish to receive a higher level of current income. In the course of this article, I will also examine the question: “Should I perhaps hold both in my portfolio?” Towards the end, I also offer a link that will give you a peek into my own portfolio. This article is designed to be read in conjunction with the most popular article I have managed to write to-date for Seeking Alpha, with over 7,750 web and mobile views and counting. In that article, I featured the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ). I explained why, after considering attempting to build a little 10-stock “mini ETF” of my own, I decided instead to add to my weighting in that particular ETF. While noting that VIG carried a rather modest SEC yield of 2.19%, I featured the structural reasons that one could expect this dividend to grow over time. But what if you are an investor who says: “Forget dividend growth! I want my dividends and I want them now!” As it happens, I have just the ETF for you. This article will discuss another Vanguard ETF that forms a piece of the “bedrock” of dividend income that supports my portfolio; namely the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). When I say “read in conjunction with,” what I mean is that I will attempt not to bore the reader by repeating the information and concepts developed in that previous article, but rather expand on them, clarify similarities and differences between the two ETFs, and ultimately attempt to address the question: “Why might I want to have both ETFs in my portfolio?” Expense Ratio and Composition While, at times, other ETF providers make a wonderful marketing splash by being able, for example, to at least temporarily tout that they offer the world’s cheapest ETF , one of the things I admire about Vanguard is that it offers a wide variety of ETFs – including some that are specialized – at extremely low expense ratios. VYM is no exception. Like its stablemate VIG, its expense ratio is a mere .10%. In this case, what do you get for your .10%? Here’s a quick overview from VYM’s fact sheet on the Vanguard website: Right off the bat, then, we see that VYM tracks the FTSE High Dividend Yield Index and does so in passive fashion, using a full-replication approach. As it turns out, this index represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . From the linked fact sheet, we find that: This index comprises stocks that are characterized by higher-than-average dividend yields. REITs are removed from this index, because they do not generally benefit from currently favorable tax rates on qualified dividends. Additionally, stocks forecast to pay a zero dividend over the next 12 months are also removed. Finally, the remaining stocks are ranked by annual dividend yield and included in the index until the cumulative market cap reaches 50% of the total market cap of the universe of stocks under consideration. The index is reviewed semi-annually, in March and September. Finally, the associated Vanguard Advisor’s page reveals that “buffer zones” are utilized during the annual rebalancing exercise, to reduce portfolio turnover. This index is a little broader than the one utilized for VIG. Currently, VIG contains 179 stocks, and VYM contains 435. The fund currently has $15.6 billion in Assets Under Management (AUM), with daily average trading of $43.41 million. It has an average trading spread of 0.02%. Finally, the fund’s current SEC yield is 3.14%. Comparing VYM With VIG. Should You Hold One? Both? In this section, I will expose the differences and similarities between VYM and VIG. Ultimately, it is my hope that it helps you to decide whether you would like to add one or the other to your portfolio or, like I do, maintain a target weighting in both. To help you conceptualize the differences, I first used the charting capabilities of Excel to visually display the differences in their sector breakdowns, with all percentages being taken directly from the Vanguard fact sheets. From that graphic, you likely noticed that VIG is much more heavily weighted in: Consumer Goods Consumer Services Industrials In contrast, VYM tends to feature: Financials Oil & Gas Telecommunications Utilities When it comes to Basic Materials, Healthcare, and Technology, the weightings are very similar. Next, have a look at the comparative Top-10 holdings of the two ETFs, to see how these themes play out in their largest holdings: There are perhaps two intuitive takeaways from this: VYM tends to feature what might be described as slightly “stodgier” companies. These are certainly not rapid growers. Rather they are established companies in low-growth businesses which deliver a large part of their earnings to shareholders in the form of dividends. VIG tends to feature companies with lower current payouts, but slightly faster growth. If you decide to include both in your portfolio, there is some overlap (3 similarly-weighted sectors, 3 stocks in the Top-10 holdings of both). However, it could be argued that there is a greater level of variance (3-4 sectors with very different exposure, 7 stocks which are not found in both Top-10 holdings). Let’s next turn to relative performance. In reviewing the comments from other Seeking Alpha articles, I have noticed some skepticism regarding dividend-paying stocks, and therefore related ETFs, on two fronts: In good times, they tend to underperform the S&P 500. Conversely, they often don’t hold up so well when the market experiences a sharp downturn. In that vein, you may find the following charts helpful to review. First, I started by laying both VIG and VYM against the S&P 500 index over the past 5 years. VYM data by YCharts Interestingly, I actually find VYM’s performance to be rather stunning. Though it has trailed the S&P 500 by roughly 6% over that time frame, as the next chart shows it has also consistently delivered a dividend in the range of 2.75-3.25%. In contrast, on both counts, VIG’s comparative performance over this period appears slightly underwhelming. VYM Dividend Yield (TTM) data by YCharts Next, though, let’s have a look at the last extended major downturn, covering the period between 10/1/2007 and the bottom on 3/9/2009: VYM data by YCharts In this drastic negative environment, VIG emerged as the clear winner, besting the S&P 500 by a full 8.5% and VYM by over 10%. However, again using the S&P 500 as our benchmark, VYM also held up comparatively well. Summary and Conclusion I am of the belief that dividends are an invaluable component of a solid, well-balanced portfolio. In my case, I have elected to maintain modest holdings in both AT&T (NYSE: T ) and Verizon (NYSE: VZ ) in my personal portfolio for the express purpose of having a solid foundation of dividends. The linked article also explains my rationale for not automatically reinvesting my dividends, and what I do instead. That is why VYM forms an integral part of my portfolio as well. Currently, it stands at 5.18%, augmenting my 7.22% weighting in VIG, for a total of 12.40% between the two ETFs. Should you hold both VYM and VIG in your portfolio? If you are interested in a steady stream of dividends while at the same time benefiting from both great diversification and a low expense ratio, I believe the above evidence suggests that you should. VYM offers a higher current dividend yield while VIG may offer both a little more growth as well as better protection in the event of a market downturn. As always, whatever your personal choices, I wish you. Happy investing!

High-Yield Utility That Has Fallen Off Everyone’s Radar

Summary Brookfield Renewable Energy yields 6.6%, over 1.6% higher than the typical utility that yields under 5%. The company is riding on the mega-trend train of a global growing demand in renewable energy, and the business has the expertise to bank on acquisition opportunities. The business forecasts dividend growth of 5-9% per year through 2020 and a long-term shareholder return of 12-15%. I’m primarily a dividend growth investor. So, current income and growth of that income is important to me. Utilities are typically known for their high yields. So, buying utilities, I expect a good part of returns to come from their dividends. The lower the price goes, the higher the yield climbs. That’s the case with Brookfield Renewable Energy Partners LP (NYSE: BEP ), as it has fallen over 18% from a year ago. (click to enlarge) Compared to most other popular utilities, Brookfield Renewable has performed quite poorly price-wise in the past year. Particularly, I’ve put it in a chart with Consolidated Edison, Inc. (NYSE: ED ), Duke Energy Corp (NYSE: DUK ), WEC Energy Group Inc (NYSE: WEC ), and Southern Co (NYSE: SO ). Source: Google Finance The utility group typically yields in the 4-5% range, and Brookfield Renewable stands out by yielding 6.6%. But, perhaps, that’s because it is viewed as higher risk with an S&P credit rating of BBB, while the others all have a rating of A-. BEP Dividend Yield (TTM) data by YCharts To consider it as a potential utility holding, the question you want answered is probably: “Is Brookfield Renewable Energy’s distribution sustainable?” First, let’s find out if it’s the kind of business you want to own. Business and Assets Brookfield Renewable has started investing in hydropower facilities 20 years ago. Today, it has become one of the biggest public pure-play renewable businesses with global assets. It focuses on accumulating long-life and low-cost assets that will continue generating cash flows. Since it requires deep operational knowledge and marketing expertise to enter the space, there’re significant barriers to entry. Brookfield Renewable has $19B worth of power assets, including around 250 power generating facilities across 14 markets in 7 countries. 81% of its 7,300 MW capacity is generated by hydroelectric facilities with about 18% generated by wind power. Currently, 50% of its assets are in the U.S., 25% are in Canada, 20% are in Brazil, and 5% are in Europe. Not Just an Income Play, But Also a Growth Play Demand for renewable energy has been growing. New investments in renewables around the globe have grown from $45B in 2004 to $270B in 2014, a CAGR of 19.6%. More recently, from 2013 to 2014, they grew at a rate of 16.4%, which is still admirable growth. Specifically, hydro power capacity grew at a CAGR of 4% over the decade, and 3.6% from 2013 to 2014. Although its growth only keeps pace with inflation, hydro power generation is low cost, and is more reliable than wind power generation. On the other hand, wind power capacity grew at a CAGR of 22.7%, and 16% from 2013 to 2014. In the last four years, Brookfield Renewable acquired and developed about 3000 MW, which is a CAGR of about 14%. How Does Brookfield Renewable Grow? Over the next 5 years, Brookfield Renewable plans to deploy over $3 billion of equity, expecting 15% returns. The focus will continue to be on hydro power generation, and acquiring global renewable assets at attractive prices. For example, in 2004, Brookfield Renewable acquired a 600MW capacity pumped storage asset with its 50% joint partner during a period of low power prices for $99M. It then entered into a 15-year contract that creates a predictable cash flow stream. At the same time, it’s not shy from selling for good profit as well. For example, in 2009, Brookfield Renewable acquired an early-stage wind power development project for $90 million. It finished constructing it and optimized operations by leveraging its wind expertise to maximize value. In July 2015, it sold the asset by attracting global bidders and generated an internal rate of return of about 30%. Like it did in North America and Brazil starting in 2011, Brookfield Renewable can continue its value creation process and repeat it in Europe, Latin America, and other new markets. A Safely Growing Dividend As Brookfield Renewable grows, it doesn’t forget to reward shareholders. From the distribution that commenced in 2011, it has grown from a quarterly distribution of 33.75 cents per share to 41.5 cents per share this year, a CAGR of 5.3%. About 90% of Brookfield Renewable’s cash flows have a 17-year average contract term with inflation-linked escalation, so its cash flows remain stable to support its distributions. Further, it targets an FFO payout ratio of 70%. With FFO expected to increase by $220-$280M a year, Brookfield Renewable forecasts distribution growth of 5-9% per year through 2020. Valuation Brookfield Renewable believes it’s intrinsically worth $34 a share even when excluding potential for rising prices, and existing project pipelines. At $25, it is discounted by over 26%. Adding in organic growth, the business believes it’s easily worth over $40 in the future, implying a significant discount of over 37%. (click to enlarge) Source: Brookfield Renewable October Investor Meeting – Slide 35 What Should Be Your Returns Expectation? Other than forecasting distribution growth of 5-9% per year through 2020, the business’s objective is to deliver long-term total returns of 12-15% to shareholders annually. With a current yield of 6.6% and the distribution estimated to grow at least 5%, that implies a rate of return of at least 11.6%, which is close to the low-end of that objective. Conclusion I just added to my position in Brookfield Renewable last week. How about you? Did you buy any utilities recently? Share in the comments below! If you like what you’ve just read, follow me! Simply click on the “Follow” link at the top of the page to receive an email notification when I publish a new article. Resources and References Brookfield Renewable October Investor Meeting ( pdf ) Brookfield Renewable November Presentation ( pdf ) Ren21 Renewables 2015 Report ( pdf )