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Avista Corporation: This Utility Is A Buy

Summary Power generation mix is nearly all clean energy. Dividend history is solid, management guidance for 4-6% growth going forward. Only moderate leverage; Avista hasn’t been on a borrowing spree like most utilities. Shares are just simply one of the top picks in the utility sector. Set it and forget it. Avista Corporation (NYSE: AVA ) primarily operates as a regulated utility business, with the majority of revenue derived from providing electric and natural gas services to customers in Washington, Idaho, and Oregon. While the company does serve some customers in Montana and Alaska (via the AERC acquisition), these operations, along with the non-utility businesses, are fairly immaterial to company earnings. Despite favorable generation capacity, healthy dividend growth, and favorable rate case filings, shares have largely tracked broader utility sector results. Are shares poised to outperform in the future? Favorable Power Generation Bucking the trend of utilities that are woefully behind the curve in emissions standards, Avista’s 1,800MW of generation capacity currently consists of 56% renewables and 35% clean burning natural gas. It isn’t a surprise that the company consistently wins awards for being one of the greenest power producers in the United States. This is a big positive for shareholders. My attraction to Avista and companies with such strong renewables mixes is not born out of liberal thinking but a mere acknowledgement that it is extremely unlikely that current federal and state regulations regarding emissions standards get dialed back. The company’s power generation portfolio simply makes regulatory overhang due to increased renewable standards from state regulators and the federal government a non-issue. If I’m an investor looking for steady income, I don’t want to see surprise jumps in capital expenditures to bring plants into compliance or bad press from dirty power generation [think PLM Resources’ San Juan Generating Station (NYSEMKT: PLM ) or Duke Energy’s (NYSE: DUK ) coal ash basin spills]. Fact is Avista’s power generation mix greatly exceeds even the strictest of mandates, including those set for implementation in 2035 or later. This should help investors sleep easier at night. Operational Results (click to enlarge) Utility revenue has been moving up slowly, primarily based on growth in residential and commercial consumers, while revenue from industrial customers has been weakening since the expiration and subsequent renewal at lower rates of some large customer contracts recently. Revenue can be volatile. This is because Avista often chooses to sell its excess natural gas when current wholesale market prices are below the cost of power generation using its natural gas plants. Years that see these sales generally see higher revenue (due to these sales) but lower profit and operating margins. Investors can use 2014 versus 2013 as an example. In 2014, Avista sold $43M less natural gas in the open market ($84M in sales versus $127M in 2013). So while revenue only expanded marginally (2.2%), operating income grew 10% due in part to better margins. Additionally, shrinking operations and maintenance costs in spite of growing revenues is also a compelling sign to me that management is keeping a close eye on costs. With incremental revenue gains being hard-fought in the utility sector, any expense reductions that yield operational efficiency gains should be lauded. Money In, Money Out (click to enlarge) Like I do with all utility analysis, I look to make sure that cash being spent does not greatly outweigh cash being generated from operations. Utilities in general have been on a spending spree in the past few years due to looming regulatory burdens and record low interest rates. Debt issuance has been both necessary and coincidentally quite cheap, leading utility management to feat on the smorgasbord of easy money. Avista’s overspending and subsequent debt issuance has been relatively mild in comparison, especially considering that the company raised $245M in cash from the sale of the Ecova business in 2014, with the majority of those proceeds used to offset common stock dilution. Total long-term debt raised between 2011 to the current period has been just $250M. Because of this, Avista’s net debt/EBITDA stands at 3.3x, making it one of the least leveraged utilities I’ve analyzed recently. Operational cash flow should grow during 2015-2017 through rate recovery increases while capital expenditures flatten in the $350M range. This should decrease the deficit we see in the cash flow analysis. Overall, I don’t see an alarming trend here that should worry investors. Conclusion With a current dividend yield of approximately 4%, shares are trading slightly higher than historical averages by approximately 5%. While many investors would elect to wait it out for shares to drop, in the grand scheme of things an investment strategy like that can make you miss out on some valuable opportunities. Establishing a half position and electing to buy on dips might be the better strategy. In my opinion, Avista’s diversified utility business is one of the safest available options in the publicly-traded utility sector. Shares, however, don’t seem to carry any real premium for this value. While I don’t own shares (I instead own shares in Calpine Corporation (NYSE: CPN ) and AES Corporation (NYSE: AES ) given my heavier risk appetite than most), I certainly would if I was an income investor, even at these prices. Management’s guidance of 4-6% dividend growth in the years to come is both manageable and ahead of most utility peers. I’ve looked at many picks in the utility sector in the current market, and very few of them appear to trade at or below fair value. Avista isn’t one of them. If you’re long, congratulations on holding a winner. If you aren’t and are an income investor, you should consider it.

ETFs To Watch As Emerging Market Asset Outflow Doubles

Emerging markets have been out of investors’ favor over the past several months piling up heavy losses. Domestic strength in the U.S. raising the possibility of a Fed rate hike, lower commodity prices and economic turmoil in China have resulted in a massive sell-off in emerging market stocks in the past few months. The last week was disastrous for the emerging market ETFs as outflows from these funds more than doubled over the previous week, according to data put together by Bloomberg . Outflows from emerging-market ETFs were $566.1 million last week compared with $262.1 million in the previous week. About 85% of the outflow comprised stock funds and the remaining bond funds. According to Bloomberg, Taiwan witnessed the biggest outflow, all from stock funds. Withdrawal from Taiwan funds reached $93.3 million last week, compared with redemptions of $19.9 million in the previous week. Brazil experienced the second biggest outflow, with more than 90% from stock funds. Investors pulled back $68.7 million from this country ETFs last week in sharp contrast to an inflow of $12.8 million in the previous week. Below, we highlight three popular emerging market ETFs that have experienced significant net asset outflow in the week ended October 2. iShares Core MSCI Emerging Markets (NYSEARCA: IEMG ) – $530.9 Million This ETF tracks the MSCI Emerging Markets Investable Market Index, designed to measure large-, mid- and small-cap equity market performance in 21 emerging market countries. The fund has the highest exposure to China (22.2%), followed by South Korea (15.8%) and Taiwan (13%). It has amassed roughly $7 billion in its asset base while it trades in a volume of roughly 3 million shares a day. It charges 18 bps in fees from investors per year and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) – $318.8 Million This is the top asset grossing emerging market ETF, which follows the market-cap weighted FTSE Emerging Index that measures the performance of roughly 850 large and mid-cap companies in 22 emerging markets. This fund is also highly focused on China (26.6%), followed by Taiwan (14.1%) and India (12.7%). VWO has garnered nearly $35 billion in assets and trades in a heavy volume of roughly 16 million shares per day. It charges 15 bps in annual fees and carries a Zacks Rank #3 with a Medium risk outlook. iShares MSCI Emerging Markets Mini Vol (NYSEARCA: EEMV ) – $139.5 Million This ETF tracks the MSCI Emerging Markets Minimum Volatility Index, measuring the performance of large- and mid-cap securities in 21 emerging markets that have lower absolute volatility. EEMV is heavily biased toward China (18.7%) as well, while Taiwan and South Korea occupy the next two spots with shares of 17% and 12.3%, respectively. The fund has gathered around $2.5 billion in assets and trades in an average volume of 500,000 shares. It charges 25 bps in fees per year and carries a Zacks Rank #3 with a Medium risk outlook. Original Post

The Benchmarks Lie, Here’s How

Many investors, new and experienced alike, are intent upon “beating the Dow” or “beating the S&P.”. A laudable goal except that… …those indices are always moving targets! The benchmarks lie. Many investors, new and experienced alike, are intent upon “beating the Dow” or “beating the S&P” rather than seeing their capital increase over time. It isn’t that difficult to beat the benchmarks. We’ve done it over 15 years from 1999-2014 and this year the markets, so far, are down 6% to our 1% so we hope to keep that trend alive. On the other hand, for investors who place their faith in buying only companies that are in the benchmarks often find it is difficult to beat the indexes. That’s because “the benchmarks lie.” Every time a company disappoints the keeper of these benchmarks, S&P Dow Jones Indices (a McGraw Hill Financial subsidiary) they boot it out of the index and replace it with something they consider more “representative.” I don’t believe it is a coincidence, however, that “representative” usually equates to rising relative momentum, making the index performance look considerably more attractive — although that index may have a completely different composition than the one you bought before all their changes. As for the companies booted out, they are still in business but, if you bought a mirrored portfolio of those 30 stocks, you own the same 30, but the index and its ETF clones own a very different index — and not because the component companies went out of business or failed to meet regulatory requirements. Assuming S&P Dow Jones Indices are correct in their momentum assessment, the results are regularly skewed upward. So if you obsess over, “why didn’t the 30 Dow stocks in my portfolio keep up with the Dow Jones Index?” well, in Nov 1999, did you toss Chevron (NYSE: CVX ), Goodyear (NASDAQ: GT ), Sears (NASDAQ: SHLD ), and Union Carbide out of your portfolio and replace them with Home Depot (NYSE: HD ), Intel (NASDAQ: INTC ), Microsoft (NASDAQ: MSFT ), and SBC Communications (which a few years later acquired/became AT&T?) S&P Dow Jones Indices did. In April 2004, did you sell AT&T (NYSE: T ) (after just 5 years in the index,) Eastman Kodak (out of bankruptcy now and again trading on the NYSE) and International Paper (NYSE: IP ) and instead buy AIG , Pfizer (NYSE: PFE ), and Verizon (NYSE: VZ )? Or in Sep 2008 sell Altria Group (NYSE: MO ) and Honeywell (NYSE: HON ) in order to buy Bank of America (NYSE: BAC ) and Chevron (which I suppose the indices gurus decided was worthy once again?) In 2009, when Citigroup (NYSE: C ) and General Motors (NYSE: GM ) stocks were plunging, did you switch to Cisco (NASDAQ: CSCO ) and Travelers (NYSE: TRV )? Or did you exchange AT&T for Apple (NASDAQ: AAPL ) this year? There are many other examples but you get the idea. “Representative” seems to mean “on its way up” — though it doesn’t always work out that way. A recent anomaly in the last couple years indicates some boot-ees do better than the new inductees, though it remains to be seen if this will continue. That brings us to an interesting example just today of how trying to read too much into a benchmark can confuse or backfire. The S&P closed down 0.35% and the Nasdaq closed down 0.7% — but the Dow is up .08%. How come? Well, the Dow has only 30 components so if one of them soars or plunges on one day it can affect the index out of proportion to its long-term trend. Today it was DuPont that sent the Dow ahead (which will no doubt lead some feckless commentator to claim that, since the Dow means Blue Chips, that the “leadership of the Dow today proves” that the markets will rise.) But the reason the Dow rose as DuPont rose 10% today? The CEO said she would retire, giving rise to speculation the company may be broken up, hardly an event likely to be repeated every day. The bottom line is that I continue to believe that intelligent stock (and preferred, bond, ETF, CEF and mutual fund) selection remains key to market success, that indexes can be beaten by this approach, and that markets go up and down, meaning there are times to enter trailing stops, adjust your portfolio percentages to include more cash, bonds or hedges. In my next article, I will give some current examples. Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. Best regards, Joseph L. Shaefer