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Westar Energy: Why I’m Buying This Midwest Utility

Summary Westar Energy is a solid utility company with an 11-year history of increasing its dividend. Kansas economy grows despite tax problems initiated by its state governor. Westar stock sports a 3.89% yield. I’ve been watching Westar Energy (NYSE: WR ) since 1999. As a journalist, I covered the rise and fall of David Wittig, former Westar Energy CEO, who ran the utility like a hedge fund, making a big bets on various businesses unrelated to electricity generation. Westar Energy was for many years a natural gas and utility business. Because of Wittig’s mismanagement, the company was forced to sell natural gas assets to pay down debt. The debt reduction and subsequent CEOs’ focus on improving Westar’s utility business helped the company’s bonds become investment grade by the rating agencies. The company is way more attractive today as an investment than 16 years ago when I started covering it. I have met every CEO of this company since 1999. Toward the end of his reign Wittig was trying to dismantle the company by selling off assets, it was sad to watch. Investors who bought the stock at $9 per share during the crisis in the early 2000s have done quite well, but at the time, there was a very dark cloud over the company. I believe Wittig should have been running a hedge fund, not a regulated utility. Wittig resigned in November 2002 amid a scandal that involved a local banker in a real estate deal. Wittig’s cloud hung over the company until the two parties settled for $36 million payout to Wittig in 2011. Under CEO Jim Haines, Westar streamlined into a pure-play utility company. Bill Moore continued this mission while embracing wind power and cheap natural gas generation. Current President and CEO Mark Ruelle has picked up momentum by investing in wind generation and transmission projects while upgrading coal fired power plants to meet stringent emission standards. Westar spent over $1 billion in air quality investments in the past five years. The company is winding down expenses in air quality, from upwards of $200 million annually to less than $100 million this year and less than $30 million 2016. A June 2, 2015, presentation says Westar has seen “dramatic improvements in air quality.” Wind Renaissance Meanwhile, Westar Energy has really increased its use of renewable energy, especially wind. Renewable energy is currently 9% of generation mix — more than uranium at 8%. Renewable energy will grow to 16% in 2015. This is huge. And coal is declining. Westar uses cheap natural gas to generate electricity. Natural gas is easier to use than coal. Coal plants take some time to start up and shut down. Natural gas generators are quick to turn on and off. So natural gas assets are timely when the wind isn’t blowing, although the wind blows mightily in western Kansas most of the time. (click to enlarge) A year ago, Prairie Wind Transmission, LLC, a joint venture between Westar Energy and Electric Transmission America, celebrated completion of its 108-mile, 345-kilovolt high-capacity electrical transmission line in south-central Kansas. The double-circuit line will serve as an electric energy super highway between eastern and western Kansas, promoting growth of renewable energy in Kansas, providing greater access to lower-cost electricity and improved reliability in the region. Electric Transmission America is a joint venture between subsidiaries of American Electric Power (NYSE: AEP ) and Berkshire Hathaway Energy (NYSE: BRK.B ) to build and own electric transmission assets. “With our current wind resources and those we’ve already committed to next year, we’ll have enough renewable energy to power half our residential customers,” Ruelle said in a recent call with investors. Ruelle said Gov. Sam Brownback has favored renewables. “It’s just pragmatic Kansas politics,” Ruelle said . “He has been a big sponsor of renewables and supported renewables for what it means for rural Kansas. But as you also know there are folks that don’t like the concept of subsidize the energy period and Kansas has made a lot of progress in renewables and everybody has sort of been doing it…We have been doing it because that makes sense economically. And basically Kansas got to a place where we didn’t think a mandate was probably needed to step it up. We’re doing it not because of the mandate, we’re doing it because it’s relatively inexpensive and it’s a good way to navigate the environmental rates.” Westar Energy is the largest electric energy provider in Kansas, providing generation, transmission and distribution to approximately 687,000 customers in east and east-central Kansas. The company is headquartered in Topeka, and employs about 2,400 people in Kansas. Its energy centers in 11 Kansas communities generate more than 7,000 megawatts of electricity, Westar operates and coordinates 34,000 miles of transmission and distribution lines. The Economy The Kansas economy has grown slowly and steadily since the Great Recession of 2008-09, but lags the robust growth of Nebraska or Colorado. Kansas Gov. Sam Brownback is business friendly, but his tax policy has drained state reserves and forced cuts to education and welfare. The political situation here is backward to say the least. Growth occurs in places like Wichita because it is more entrepreneurial than Topeka, it’s not surprising that Pizza Hut started in Wichita. You will find more entrepreneurs in western Kansas than in the statehouse of Topeka. Kansas’ Gross State Product has grown from $121 billion in 2009 to $144 billion in 2013. In a recent conference call, Ruelle said, industrial sales were mixed to down. “The biggest negatives are from our largest chemical manufacturer and pipelines reflecting the impact of lower oil prices,” Ruelle said. “On the positive side, the refineries were operating at capacity and commercial aerospace remains strong. Other good news is that the large candy maker (Mars) who just came to our service territory a couple of years ago has already announced a big expansion and that will add a few more megawatt to our sales.” Rate case Westar Energy asked regulators for a $152 million rate increase but the Kansas Corporation Commission staff recommended $55 million based on a 9.25% Return on Equity (ROE). “If adopted that would be among the lowest authorized ROEs in the nation,” Ruelle said on the investor conference call. I believe the KCC’s proposed 9.25% ROE is lower than the historically 10% to 11% ROE built into previous rate cases. The KCC’s decision on the rate case is expected by Oct. 28 with implementation of new rates in November. I predict a negotiated settlement somewhere around $75 million. That would add $0.53 cents per share in revenue or about $0.06 cents per share in profit. EPS for the trailing 12 months was $2.25 per share, while the company is predicting 2015 earnings guidance at $2.18 to $2.33 per share. An additional $0.06 cents from the rate case would increase EPS by 2.6%. With large air quality projects finishing in 2015, the company’s need to raise capital has diminished. The company has a decent balance sheet, plenty of liquidity and no need for new equity. As a result, I expect the company to continue its trend of increasing its dividend. Growth and income investors will like this: The company has increased its dividend every year for 11 years. Payout ratio is reasonable at Westar Energy. Company pays out 60% to 75% of earnings in dividends. The current $0.36 cent per share quarterly dividend is a yield of 3.89%. I like the stock at $36.00. I believe the stock is fully valued at $40 per share. WR was trading at $39 per share in mid August before the recent stock market correction. Risks It is likely the Federal Reserve will start raising interest rates. This may or may not happen in 2015, but I do expect rates to go up by fall 2016. The cost of debt will go up for all utilities, including Westar Energy. However, I believe we will see relatively low interest rates for many years, perhaps the next decade. Economic growth is sluggish in Kansas. Gov. Sam Brownback eliminated income taxes for most small businesses, with the hope the owners would re-invest the tax savings into job creation. But business owners, farmers and ranchers did not need additional employees, so they never went on a hiring spree as Brownback had hoped. With a reduction in state revenue, local school boards will likely raise property taxes to fund the education gap. Weather has been mild all year, reducing the need for a boost in generation that is typical in summer months. Conclusion Westar Energy is a solid company with good management. A year ago I had purchased Westar stock at $36 per share and sold it at $40 per share. I recently bought shares at $37.07, and may add shares at lower prices. The stock market is going through substantial volatility. I can sleep at night owning this stock. People need electricity. Westar rates are among the most affordable in the country. I believe a rate increase will happen this fall and the company will be able to raise its dividend in 2016. Disclosure: I am/we are long BRK.B, WR. (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.

Conservative Total Return Portfolio- Bends But Doesn’t Break!

Summary Post-market swoon, the CTR portfolio has strong income and good upside potential. HOG was sold for a profit, while SBGI and TUP are new additions. CTR (equal weighing) yields 3.7% with a 9.6x forward PE. I introduced the “Conservative Total Return” or CTR portfolio in August 2014 and try to provide monthly updates. The volatility of the market delayed writing by a week. However, after taken my lumps, and tweaking the portfolio, I actually feel better about the holdings (than in recent months). The general philosophy of my ‘picking’ method has allowed me to cumulatively beat, since 1999, the S&P 500 by a healthy margin. As the market has “evolved”, so have the holdings. While the investments in the CTR are conservative, the portfolio is dynamic (as is the market and its “favorites”). Every single stock owned in July and held into August is down. After reviewing the metrics, forecasts, and upsides I feel good to great about each position. The upside potential of holdings are material (average forward PE is only 9.6x), dividends for most of the portfolio are a very strong (I get paid if I have to wait) average of 3.7%. General Electric (NYSE: GE ), which I believe in, is probably the most vulnerable to being swapped out due to being nearly fully valued. That being said, I am reluctant to exit a stock that is on the verge of executing on management’s strategy (industrial focuses, “smart factory” and Alstom synergies). Since the last update, I added to existing positions in Apple (NASDAQ: AAPL ) and International Business Machines (NYSE: IBM ). I sold Harley Davidson ((NYSE: HOG ) $58.95) for a nice profit, not because I dislike HOG, but because macro changes in China and the emerging markets made me a little less confident about near-term sales. Fortunately, this decision was made prior to the market swoon. I also added three positions to the portfolio, in 1) an attempt to diversify (the recommendation of a number of readers) and 2) take advantage of two great companies with material upside potential. The additions were Goodyear Tire (NASDAQ: GT ), Sinclair Broadcasting (NASDAQ: SBGI ) and Tupperware (NYSE: TUP ). GT is geographically diversified, operationally strong, has a very strong position in the growing US market and is really cheap. SBGI holds leading positions in local broadcast stations throughout the United States and is well positioned to grow through 1) enhanced retransmission fees, 2) cost savings and consolidations, 3) sale/valuation of excess spectrum and 4) the projected doubling of political advertising for the 2016 election cycle. I lamented not buying SBGI after great earnings, when the stock tanked in the downdraft of cable-oriented worries, and pulled the trigger when the stock hit recent lows. TUP was acquired because it offers a stable and logical growth plan supported by macro-demographic trends. The stock pays a huge 5%+ dividend and will benefit from any combination of currency improvement and market execution. Notwithstanding the short-term, this stock should perform well over an extended period as the middle class in emerging markets is growing. Even though I modify my positions, I do not trade on a whim. Therefore, while I may “swap” positions in the near future, the trades will be made more on long-term merit and less on temporary market anomalies. I continue to be interested in increasing financial exposure, but do not want to buy more JPMorgan (NYSE: JPM ) due to a good sized position, but am more concerned about foreign exposure from the other bank I have been stalking – Citigroup (NYSE: C ). The Conservative Total Return Philosophy The essence of the CTR method is to combine a strong value bias with flexibility, opportunism and an ability to assimilate and respond to new information. The core philosophy will always be the same; however, as the economic cycle grows older, identifying the appropriate time to “harvest” becomes increasingly important. In assessing the prospects for all of the portfolio members, I feel good that the risk-reward dynamic is positive and, on a risk-adjusted basis, market beating (taking into account the strong value provided by dividends). Feedback from readers has been a partial motivator in my broadening my market segment exposure. The Individual Stocks The core stocks in the portfolio are (alphabetically): American Airlines (NASDAQ: AAL ), AAPL, Blackstone (NYSE: BX ), Discover Financial Services (NYSE: DFS ), Ford (NYSE: F ), GE, General Motors (NYSE: GM ), GT, IBM, JPM, KKR & Co (NYSE: KKR ), Siemens (OTCPK: SIEGY ), SBGI and TUP. (click to enlarge) Source: Yahoo! and TDAmeritrade As the above chart confirms, my positions have a strong bias toward dividends, reasonable valuation and a moderate (in most cases) PEG. Below are comments summarizing my interest in the equity. The chart also contains the appropriate metrics (valuation, fair value, potential gain). As you can also see, the positions held since the last report are all down (HOG, the only position sold, was sold for a nice profit). Holdings Apple ( AAPL )- AAPL did not thrill during Q2 earnings and was further hit during the market downturn. Atypically in recent times, AAPL has room to run with catalysts being 1) new/exciting products introduced during a recently announced early September meeting, 2) continued confidence on iPhone sales and 3) any positive feeling from payments or the watch (both have been either ignored or derided). Blackstone – BX was sold and re-bought. It is best of breed, well-funded and poised to profit from market distress and volatility (especially in energy and China). The harvest of US residential is viewed by the author as a positive. Discover Financial – DFS should be worth more. The stock has had some execution challenges but is still cheap and poised to benefit from a growing US economy (and the gas tax cut, which got a ‘jolt’ with the recent drop in gas prices). Ford – F is doing very well. The F150 is a hit. Yes China is slowing, but Europe is recovering and the US economy continues to do well. While not quite as cheap as General Motors , F offers nice appreciation potential and is a good “partner” to GM in the portfolio. The ‘market’ must stop hating the autos for F to realize ‘fair value’. General Electric – The recent pullback made GE a better value, however, it is the most ‘fully valued’ of the portfolio holdings. I believe catalysts include a weaker dollar, conclusion of the Alstom deal and longer term include Alstom synergies and the merging of industry and technology (Predix/Brilliant Factory initiative). Goodyear Tire – A new holding. Basically a well-managed company, diversified that is benefiting from an improving US and European economy (more cars, cheaper gas = more miles driven = faster tire replacement). General Motors – Even more than F, GM is the stock everyone loves to hate. GM is down 20% since the last portfolio update. Looking at the numbers, the risk/reward looks very favorable. As with F, China is concerning, but solid progress in Europe and the US should continue. Low gas prices for the foreseeable future put a backstop on highly profitable truck and SUV sales. I believe analysts are too focused on China (less than 10% of profits last quarter) and not focused enough on profitability. Harley Davidson – Sold at a profit. Concerns over China and a bump in price combined to create an environment where I exited at a nice profit. Still love this iconic brand. International Business Machines – IBM continues to disappoint, including a weak second quarter. However, limited China exposure, the US dollar weakening and management continuing to make progress combined with a 3.5% dividend leaves me optimistic about better performance over the next few quarters. JPMorgan – JPM is my favorite bank to own. The stock pulled way back and is in a strong position to regain $70 and perhaps hit $80 after the market stabilizes and the Fed increases rates (now most likely +/- Q1 2016). Siemens – Continues to be a play on recovering Europe and a weak US dollar. After GE and Honeywell (NYSE: HON ) have performed and appreciated, SIEGY remains a “show me” laggard. It may take a while, but SIEGY should deliver appropriate total returns through the investment period. Sinclair Broadcasting – A stock I owned a couple of years ago and am excited to own again. The Company owns TV stations in major markets. Local TV, offering local programming like news, is not subject to the same cord-cutting pressures as an ESPN. The Company owns valuable spectrum, is rationalizing recent acquisitions and will recognize huge profit increases from a record 2016 election season. Independent observers expect advertising to double from the 2012 cycle, with the share devoted to television +/- constant with the previous cycle (social media gains at the expense of direct mail). Tupperware – The Company is well managed and simply is focused on expanding distribution to its core emerging market markets. The emerging markets have a long, strong secular trend of an expanding middle class. TUP will ride that wave for many years. Short-term, a weakening US dollar the successful execution of some management expansion initiatives will grow the stock. The monster 5%+ dividend is sustainable and allows investors to get paid to wait. Position Summary In my opinion, the positions provide an increasingly diverse balance of innate conservatism, multiple and earnings driven appreciation potential and exposure to a more mature stock market. The recent market drops creates buying opportunities and additional reward given the risk (reduced by the lower stock prices). Please keep in mind that my portfolio also consists of actively managed real estate, index funds (international, emerging markets and domestic) and bond proxies. This is shared for readers who previously thought the noted stocks were 100% of my investments and lacked diversity (if that were the case, I would agree). The CTR is a portfolio of stocks that in my opinion are conservative (strong reward vs. risk bias) and well positioned to outperform with below-average risk. I own all of the stocks in the CTR (I also own other positions which I consider speculative or otherwise inappropriate to recommend). I appreciate any feedback on individual securities and recommendations on equities to add to the CTR. This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long AAPL, AAL, BX, KKR, SBGI, GE, GM, F, FT, IBM, DFS, SIEGY, JPM. (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.

3 Small Cap Value ETFs For Every Type Of Investor

I’ve surveyed the small cap ETF universe and found 3 ETFs I like. I narrowed them down for aggressive investors, conservative investors and average investors. Each ETF has a reasonable expense ratio and is broadly diversified. I am a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason. My favorite area for value stocks is the small-cap arena. My best picks over the years have been those that started as small-caps and grew due to their success. It’s these overlooked stocks whose stories I like that I spend most of my time on. However, I can’t spend all my time on them, and that’s why I’ve been hunting down 3 small-cap ETFs to share with aggressive investors, conservative investors, and the average investor. Why own a small-cap ETF? Other than the fact that small-cap stocks have historically outperformed their larger brethren and offer the best chances of obtaining a multi-bagger return, you must have diversification in your portfolio. Sector outperformance occurs all the time, and the more diversification you have, the better. If you don’t have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated. For the aggressive investor, consider the WisdomTree SmallCap Earnings ETF (NYSEARCA: EES ) . This may sound like a silly criteria, but this ETF only invests in earnings generating small-cap companies. Sure, an aggressive investor may not care if a company is generating earnings or not, but I’d argue that’s only true of GROWTH stocks. Value stocks need to be making money to be a value play. EES happens to be a fundamentally weighted index fund, taking the smallest 25% of companies in the universe of profitable small-cap companies, after removing the 500 largest companies. Since the weighting is earnings based, the companies with the largest profits get weighted the most heavily. Now, let’s be sure the ETF is defining “earnings” as what we’d expect it to. The ETF refers to “core earnings,” as defined by Standard & Poor’s, to include expenses, income and activities that reflect the actual profitability of the company. So that’s just fine by me. It’s also broadly diversified with 957 holdings and, as I’d hope for in a small-cap fund, 90% of them are under $2 billion in market cap. Sure enough, even this fund has a 26% weighting in financials, with 18% in industrials, 18% in consumer discretionary, 12% in IT, 9.5% in health care, 6% in energy and 4% in materials. I consider EES to be for the aggressive investor because it is quasi-actively managed. The assumption is that actively managed funds will be a bit more aggressively directed because investors assume management is designed to outperform. That doesn’t necessarily mean there will be greater risk, but that’s often the case. Since its inception on 2/23/07, the fund’s total returns have been 53%, and it has been outperforming its benchmark in the most recent 3-year and under periods. A basic small-cap value ETF choice for the average investor is always going to be found in the Vanguard family of funds. In this case, I look at the Vanguard Small Cap Value ETF (NYSEARCA: VBR ) . Vanguard’s approach toward value securities is to evaluate them based on price-to-book, forward earnings-to-price, historical earnings-to-price, dividend-to-price and sales-to-price ratios. It is a passively managed fund that carries 843 stocks, and the top 10 only account for 4.8% of the total asset base. I like that kind of broad diversification, and like the weighting even more. Financials account for 30.7%, industrials are 20%, consumer services at 13%, technology comes in at 7%, consumer goods is also at 7%, health care at 7%, and energy at 4%. I consider Vanguard for the average investor since it seeks to mirror the benchmark with low fees. Nothing special here. It has essentially matched the Russell 2000 Value index for a 37% return since February 2007. It has a 114% total return over the past ten years, and 104% over the past five years. For the more conservative investor, the iShares Russell 2000 Value ETF (NYSEARCA: IWN ) . This $5.61 billion market cap ETF was launched in 2000, so there’s a long enough track record for me to evaluate it as being appropriate for this class of investor. It is very well diversified with 1,314 holdings. The ETF basically takes the Russell 2000 index and pulls out companies that have value characteristics in the broadest possible sense. The average price-to-earnings ratio is 14.19, which is quite a bit lower than in recent months, making it particularly attractive. Financials account for 43% of the ETF, which is a bit more than I’d like, but the vast number of holdings offsets it to some degree. Industrials account for 12%, consumer discretionary comes in at 10.74%, information technology at 10.25%, utilities at 7%, materials at 3%, energy at 4.6% and the rest falls into health care, consumer staples and derivatives. As a conservative fund, it aims for true value plays so that downside risk is limited, but upside gains can take longer to develop. For example, it only has a 12% return since February of 2007. However, it has a 172% return over fifteen years. As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat “talking points” but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else’s when making an investment decision. Always contact your financial advisor before investing in any security. 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.