Tag Archives: alternative

Wisconsin Energy- Let’s Look At It After The Acquisition Of Integrys

Summary Half a year a go I wrote an article about WEC as a dividend growth investor. The latest Q3 report will allow me to understand whether the growth prospects are present. If the acquisition is successful, WEC will have plenty of room to grow. The post merger WEC might offer a 3.5% yield, 6% EPS and dividend growth, and all that in a business that is a regulated monopoly. Introduction Six months ago I wrote an article about Wisconsin Energy (NYSE: WEC ) as a dividend growth stock. At the time, the company was just before the acquisition of Integrys (NYSE: TEG ). Another great article in June also gave investors information about the sealed deal to acquire Integrys. On November 4th, WEC published its Q3 results. The results were great as WEC has beaten the EPS consensus by 3.5% and revenue consensus by 15%. This report and the information given by the company allow me to take a first glance at the new Wisconsin Energy company. Many dividend growth investors such a myself, divide their portfolio by sectors. I don’t like the utilities sector too much, but I am willing to allocate 2.5% of my portfolio to it. In addition, dividend investors also divide the portfolio by “types” of dividend growth stocks. We have stocks with low yields with high growth, medium yield and medium growth and high yield with low growth. It shouldn’t surprise fellow investors that as a 25 years old investor, I prefer the first and second group. However, I also buy shares from the third group for current income as well as diversification. I think that Wisconsin Energy has the potential to be a great investment, as it might offer great starting yield with robust growth especially for a utility company. All that comes as WEC is a regulated company with ROE of over 12%. The outcome of the merger The new Wisconsin Energy is the leading electric and natural gas utility in the Midwest. It has acquired a new growth platform, and it will allow it to access many more clients in the Midwest. Currently, it serves 4.4 million customers which get electricity and gas from the company. It also owns gas and electric infrastructure in several states. The merger has increased the long term debt of the company significantly over the past year. The debt was issued in order to pay for the cash part of the acquisition. However, WEC prioritize to minimize the effects of the additional debt and interest on its free cash flow. It has bought TEG for a relatively low premium when compared to others, and the additional debt didn’t decrease its credit rating. The merger allowed the 8% dividend increase in June, and raised the EPS growth guidance. At the same time, credit rating is intact and the company is managing its debt wisely. The synergies between the companies will allow additional cost savings and higher profit margins. The chairman and the CEO is very happy with the merger result: Since the close of the acquisition at the end of the second quarter, we have made significant progress in focusing our six operating utilities on world-class reliability, customer satisfaction, and financial discipline. I’m very pleased with our post-acquisition work, and we remain highly confident that the merger will deliver tangible benefits to our customers, to the communities we serve, and to the stockholders who count on us to create value. The great management is confident with the merger, and the metrics support their confidence. Revenue, EPS and dividend are up, and margins are regulated by the regulator, but still reach double digits. All this happens in a large utility company that doesn’t receive enough credit from investors. Fundamentals I have discussed the historical fundamentals lengthy in my previous article. I will briefly write the main metrics, and then show the future fundamentals estimates that make me so comfortable with Wisconsin Energy. Revenue growth is irrelevant due to the huge acquisition that resulted in massive growth of the revenue and the amount of shares outstanding. EPS grew over the past decade at a CAGR of over 7%, while dividend grew at a CAGR of over 14%, both figures are impressive. The dividend and EPS are forecasted to grow at around 7% in 2016, and 6% late on. The company is willing to maintain its 67% payout ratio, and is sure in its ability to grow EPS at a CAGR of 6% for the long run. The management is committed to its dividend which is great, and it know it has to manage the debt. Currently, the company enjoys good credit rating. The company has now many more shares due to the merger, and I believe that after some deleveraging, it will use some of its excess FCF to repurchase its shares. Buyback is not something that WEC hasn’t tried already. It used $300 million to buyback its own shares back in 2014. Opportunities Wisconsin Energy is spread across several states and therefore have exposure to several regulators. Indeed, it has the largest exposure to Wisconsin’s legislatures, but the larger spread is an advantage. Moreover, the regulator is acting in stable and fair way towards the company. It allows fair ROE, and doesn’t require too many harsh and expensive measures. The declining price of natural gas is a great opportunity. Wisconsin Energy is pretty green company that uses mostly natural gas and not coal. The whole electric infrastructure is going now towards natural gas which is much cleaner. The lower price will help the company to save money, and the fact that it uses natural gas already will reduce capex that related to transforming coal power plants to gas power plants. On top of that, Wisconsin Energy is a monopoly that enjoys a promises stream of revenues. Indeed, there is tight regulation that comes with it, but still, the company proved that they know how to deal with the regulation and show high ROE and growing revenue, EPS and dividends. Risk The larger amount of debt that the company carries is a risk. Especially now after the probability for raising interest rates is higher. In a higher interest rate environment, the interest expenses will be higher. Yet, the management is aware of that, and is willing to manage the debt carefully until they lower the debt levels. Moreover, the regulation is favorable toward Wisconsin Energy now, but it might change in the future. Expensive laws can forced upon the company, and tighter regulation might demand lower ROE from Wisconsin Energy. Both these measures can harm EPS substantially. Another important point is the lower return on equity. Since the acquisition the return on equity is lower than it used to be. This is due to the acquisition itself, and management will have to take care of it as soon as possible as the decline was pretty sharp. Valuation Valuation may seem a little bit high to some investors, but I disagree. The valuation is fair, and after today’s 4% decline in the stock price it is even more fair. I find the price today reasonable for initiating a new position. WEC PE Ratio (NYSE: TTM ) data by YCharts The forward P/E on this year is 18.15 and for next year it is less than 17. I find it to be reasonable, because you actually buy value with your money. I always like to buy value for cheap, but I don’t mind paying fair price for value as well. Conclusion I will start with a quote and a graph from the latest presentation: WEC is the only company in the S&P Electric Index, S&P Utilities Index, Philadelphia Utility Index and Dow Jones Utilities Average that has grown earnings per share and dividends per share every year for the past 12 years. If you buy Wisconsin Energy now, you buy some real value especially for a utility company. You buy 3.7% dividend yield that will grow at around 6% every year for the medium term, and you get it from a monopoly that knows how to deal with the regulation, deliver good product and satisfy both its customers and its shareholders.

Reaves Utility Income Fund: Coming Dilution Will Likely Drive Down NAV And Market Price

Summary Management has recently filed for a rights offering with SEC. The rights offering is an offer to sell more shares, which will lead to further dilution of NAV and the market price of UTG. The current downward spiral of NAV along with rights offering suggests investors would be better served by avoiding UTG. ( click to enl arge) I wrote about Reaves Utility Income Fund (NYSEMKT: UTG ) back in July, suggesting that it offers a relatively safe 6% yield paid monthly. In that article, there was a table that showed that UTG had outperformed both the S&P Utilities Index and the Dow Jones Utility Average over a 5-year period ending 4/30/2015. However the fund has not been performing as well this past year. On that same chart, total return was a -0.17% for six months, whereas the S&P Utilities index returned -1.10% and the Dow Jones Utility Average returned 3.78%. A copy of the table is shown below: (click to enlarge) Source: UTG Semi-annual Report Reuben Gregg Brewer wrote 2 articles on UTG over the past several months that indicate things are not going well at this CEF. You can read these articles here and here on Seeking Alpha. In the first article, he reports that NAV is down 11.5% for the year and that market price is down 13%. He shows some concern in the article that UTG will have to do a ROC (Return of Capital) to maintain the dividend if things don’t turn around soon. UTG has been able to avoid making ROC dividend payments over the past few years. He maintains a positive attitude toward the CEF in this article in spite of the bad news while at the same time predicting a lower price. His last 2 statements in the first article are: ” That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the ‘cheap’.” The second article chronicles the rights offering that UTG is about issue to stockholders. On 10/6/2015 UTG announced that it filed with the SEC to offer additional common shares of the fund pursuant to a rights offering. One right per share will be given to each shareholder and 1 share of UTG can be purchased for every 3 rights held. UTG also has the option to issue up to 25% additional shares based on the common shares issued in the rights subscription. Reuben Brewer offered the opinion that this offering would work out for shareholders in the long run. He wrote: “If you are a Reaves shareholder this is probably a good deal for you. Will it be a good deal in the next six months? Maybe, maybe not. But longer term the CEF appears to be of the opinion that now is a good time to put money to work. And that should work out for you if you plan to stick around for some time.” Levis Kochin violently disagreed with Brewer in the comments section by stating that the rights offering is a reach for more management fees by Reaves Asset Management. He asserted further that this offering is stealing NAV from current shareholders by offering shares below NAV. Kochin is correct in that the rights offering is a further dilution of NAV and is not in the best interests of stockholders. To see the rights offering as a positive requires one to have a great deal of faith in the managers of the fund. Mr. Brewer believes management will use these additional funds to purchase shares of beaten down dividend companies and that it will eventually work out to the best interests of shareholders. He believes that history will repeat itself when it worked out well for shareholders the last time UTG did this in 2012. Operations this year has NAV dropping at about 1% a month. The Market price of UTG has dropped faster than NAV. As of 9/30/15 NAV has dropped 9.85% and the market price has dropped 10.93%. The performance table from UTG is shown below: (click to enlarge) Source: Reaves Utility Income Fund Website (performance) Conclusion: I am currently negative on UTG because of the impending dilution coming with the rights offering and the increasing number of available shares. The distribution of more shares will likely cause an imbalance of shares offered to sell as opposed to offers to buy. Both the NAV and market price of UTG will likely be soft for the next 6 to 12 months. Therefore I would definitely not be a buyer at the present time. But if you already own UTG, you may wish to hold on to keep collecting the monthly dividend and to wait out management hoping it will invest the new money wisely. In the accounts of retired folks, I let the investment ride to collect UTG’s monthly dividend. For folks that are not retired, I sold the issue and moved the money to other investments that appear more positive over the next few months.

SDOG: Great Yields With Reasonable Sector Allocations

Summary SDOG offers an exceptional dividend yield of 3.54%. The expense ratio is a bit too high for my tastes. The sector allocation is solid as either a first allocation or a secondary allocation in the dividend growth portfolio. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs One of the funds that I’m researching is the ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expenses The expense ratio is a .40%. This is too high for my tastes. Dividend Yield The dividend yield is currently running 3.54%. For the retiree or income focused investor that is looking for strong dividend yields, the yield on this fund is excellent. Holdings I put grabbed the following chart to demonstrate the weight of the top several holdings: (click to enlarge) I would ignore the very top weighting in the chart because I’m not convinced that it is a long term location. It may simply be an artifact of the time when I grabbed the chart. The individual holdings have a ton of great dividend champions. General Electric (NYSE: GE ) has been a disappointment to shareholders over the last several years, but the dividend yield is still very high and it isn’t surprising to see it included in dividend indexes. The next thing that I like to see is the presence of both Altria Group (NYSE: MO ) and Phillip Morris (NYSE: PM ). This portfolio is loading up on the sin stocks. Should we consider GameStop (NYSE: GME ) a sin stock? I think the presence of so many video games may be reducing the productivity of younger people as much as any other single factor in the economy. If we were to go all the way down the bottom of the list we would even see Freeport-McMoRan (NYSE: FCX ) on the list which is a little interesting after they had a massive dividend cut. Of course, the price also fell far enough that the dividend yield came back 1.66%. That isn’t strong, but it does represent the exceptional loss shareholders have endured. Since I’ve got some Freeport-McMoRan in my portfolio, I’m well acquainted with the pain other shareholders have endured. I’m a little surprised they aren’t making their play on BHP Billiton (NYSE: BHP ) or Rio Tinto (NYSE: RIO ) for substantially stronger dividend income if they intend to hold stocks in the mining sector as a source of dividend income. Sectors This is a great sector allocation. They went with a fairly even weighting strategy. Since I like going overweight on consumer staples and utilities, I would see this as being ideal for a secondary dividend ETF allocation in the portfolio once the investor is getting overweight on those sectors. As a secondary dividend ETF this is offering excellent sector diversification to go with the very strong yield. Even consider the fund as a first allocation, the positions are still pretty reasonable. I would prefer to use a lower allocation to the basic materials sector, but perhaps that is just the voice of an investor that has been burned by Freeport-McMoRan. For the investor that believes mining materials will have a price recovery within the next few years, this heavy allocation would be ideal. Volatility The ETF has almost perfectly matched the S&P 500 for volatility since inception. Using returns from July 2012 to the present the annualized volatility for the fund is 12.3% compared to 12.5% for the S&P 500. The max drawdown has been a little higher at 13.6% compared to 11.9%. I wonder how much of that was due to the weight of the materials sector. Conclusion This is a pretty good ETF if investors are able to look past the dividend yield. I find a couple of the choices strange for generating dividend income, but the portfolio works as a whole and the relatively even allocation looks a reasonable choice that makes it easier to slip SDOG into a portfolio that already has some major positions filled.