Tag Archives: energy

3 Sector ETFs To Watch On Revenue Growth Potential

The ETF industry saw tremendous volatility in the April-June quarter of 2015 thanks to speculations over Fed tightening, global growth worries, horrendous equity sell-off in China, upheaval in the energy space and the nagging Greek debt deal saga. Though the Greek prime minister Tsipras finally managed to sign a bailout deal after month-long negotiations, his submission to stringent austerities proposed by international lenders brought unrest in the country. It is in such a backdrop that the Q2 earnings season has commenced this year. Overall, the second-quarter earnings season seems a resemblance of the last quarter as Q1 issues are very well present in Q2 with a combination of a strong greenback and a weak energy sector. Expectations for both earnings and revenue growth remain negative for the quarter. As per the Zacks Earnings Trends issued on July 6, 2015, earnings for the S&P 500 are expected to be down 6.7% in Q2 while revenues are likely to decline 6.1%. However, despite this depreciating background, some sectors managed to outperform, snapping the downing trend and look to offer decent returns in the ongoing quarter, even if volatility persists. While looking for these outstanding performers, we would like to emphasize on those sectors which are likely to post strong revenue gains. This is because, sales are harder to influence an income statement than earnings. A company can land up on decent earnings numbers by adopting cost-cutting or some other measures which do not speak for the companies’ core strength. But it is harder for a company to mold revenue figures by some measures. Below, we highlight three lucrative sector ETFs that could be used to book some profits in this volatile market. Each sector poses positive and strong revenue growth estimates for Q2 and offers intriguing fundamentals to protect investors’ portfolios in a tottering global investing backdrop: SPDR S&P Health Care Services ETF (NYSEARCA: XHS ) Medical or Health Care sector appears to be the best positioned with a 7% revenue growth estimate, the best in the universe of 16 S&P sectors categorized by Zacks. Rise in merger and acquisitions, Affordable Care Act, an aging global population and the sector’s non-cyclical nature amid a wave of uncertainty made the sector a true star. As a result, Health Care Services ETFs like XHS should log greater gains. XHS is up 17.4% so far this year (as of July 13, 2015) and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. iShares U.S. Home Construction ETF (NYSEARCA: ITB ) Though the first quarter was downbeat for the housing sector, spring sprung good news for the companies. In any case, its key selling season started in March and will run through the back-to-school season in September. A plunge in yields is another positive for the space. As of now, the Zacks Earnings Trend predicts 6.6% expansion in revenues from construction companies. ITB is up over 8% so far this year (as of July 13, 2015). The fund currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook. SPDR S&P Retail ETF (NYSEARCA: XRT ) Though retail sales remained soft lately as evident by the lower-than-expected June sales data, the sentiment remains strong for both the job and the housing markets, helping many to feel better about their economic situation. With rebounding U.S. economic indicators since the start of the second quarter, cyclical stocks have begun to show signs of life. To add to this, the Fed has promised a slower rate hike trajectory once the step is actually taken, most probably sometime later on in 2015. This should favor a cyclical sector like retail. Moreover, the still-subdued oil price is another tailwind for the sector as it would add up to consumers’ fuel price savings and encourage them to buy more discretionary products. Retail/Wholesale is projected to register 5.4% revenue growth in Q2, the third best in the pack. XRT is up 6.1% so far this year (as of July 13, 2015) and has a Zacks ETF Rank #1 with a Medium risk outlook. Original Post

Alliant Energy: Earnings Growth Looks Good, But Cheaper Valuations Could Be In Its Future

Summary Midwest electric and natural gas utility holding company Alliant Energy has seen its share price drop since May due to a relatively weak Q1 and bearish sector sentiment. The company’s future earnings growth looks attractive due to the presence of strong state economies in its service area and compelling arguments for new electric generation capacity. While its shares appear to be fairly valued following the recent price decline, I believe that warm winter weather resulting from El Niño conditions could make them undervalued. Short-term uncertainty aside, however, I am optimistic regarding the company’s long-term earnings potential due to its geographic location and favorable regulatory developments. The share price of public utility holding company Alliant Energy (NYSE: LNT ) approached its 1-year low last month, following both its trailing EPS (see figure) and share prices in the broader utilities sector lower in the process. The company’s share price is now trading 17% below its YTD and all-time high. While the sector has been hit by bearish sentiment of late as investors have moved away from utilities in anticipation of higher bond yields being available later in the year, Alliant’s recent downturn makes its shares look more attractive than at any other point in the last several months. This article evaluates the company as a potential long-term investment. LNT data by YCharts Alliant Energy at a glance Alliant Energy is a Wisconsin-based public utility holding company that has operated in its current form since 1981. It operates two primary subsidiary regulated utilities, Interstate Power & Light [IPL] and Wisconsin Power & Light [WPL]. IPL generates electricity and distributes electricity and natural gas to customers in Iowa and southern Minnesota. WPL provides the same services in Wisconsin. Between them, the two subsidiaries have a total of 1 million electric customers and 420,000 natural gas customers. Their combined electric generation capacity is 30 million MWh per year with a maximum peak hour demand capacity of 5,426 MW, and their annual natural gas sales and transportation volume was 123,446 thousand dekatherms in the most recent fiscal year. The electric generation capacity is divided between coal, natural gas, and renewables (primarily wind), although the combined capacity of the latter two has grown significantly over the last decade at the expense of the former. This trend is to continue over the next decade as the company replaces roughly 50% of its current coal capacity with additional natural gas and wind capacity. Alliant Energy is in the process of investing heavily in this new capacity. The natural gas capacity will take the form of two 650 MW combined cycle natural gas facilities costing a total of $1.7 billion, the first of which is expected to come online in FY 2016 (followed by the second in FY 2019). These two facilities will replace expired purchase power agreements as well as existing coal-fired capacity, thereby both reducing the company’s emissions and increasing its earnings potential. Additional capacity is expected to bring the company’s total investment to $2.5 billion by 2023. Of the two primary utilities subsidiaries, IPL is slightly larger than WPL, generating 56% of their combined operating revenue in FY 2014. Alliant Energy also owns a Resources segment that oversees non-regulated transportation services, including rail transport, barge transport, and 1.3 million tons of coal terminal capacity. Finally, the company has a 16% stake in American Transmission Company [ATC], which provides electric transmission services in Wisconsin and Michigan’s Upper Peninsula. ATC operates under a very favorable regulatory scheme with an allowed ROE of 12.2% on its 50% equity share. While it is currently operating from a relatively small base, it will likely experience company-beating earnings growth due to its relatively high ROE resulting from its investment in several transmission projects located in the western U.S. as part of a joint venture with Duke Energy (NYSE: DUK ). Alliant Energy has also been paring its less-profitable assets as a means of partially-financing its large planned capex over the next several years. This effort recently saw the company close on the sale of its Minnesota gas distribution assets for a total of $13 million in cash and promissory notes as well as the planned sale of IPL’s Minnesota electric and gas distribution assets for a total of $140 million. The loss of the Minnesota electric distribution assets will be partially offset by wholesale power agreements with their purchaser. Alliant Energy has been one of the regulated utility sector’s better performers since the end of the financial crisis, delivering a combination of earnings growth and steady dividend increases, the latter by as much as 8.5% annually (see figure). This record has been due in large part to its geographic footprint, with its service area being limited to states that fared very well during the Great Recession. Iowa, Minnesota, and Wisconsin largely missed out on the surging real estate market in 2005 and 2006, one effect of which was that they also managed to avoid the worst effects of the subprime mortgage crisis. Meanwhile, the recession did not hit the states hard due to their heavy exposure to the farm industry, which benefited strongly between 2008 and 2013 from rising biofuel blending requirements both at the state and federal levels. Furthermore, whereas old corn ethanol facilities largely depended on coal to provide process heat and power, newer facilities built after 2008 turned to natural gas instead to comply with federal regulations, boosting demand for Alliant Energy’s natural gas distribution services as corn ethanol capacity grew strongly (Iowa, Minnesota, and Wisconsin are three of the country’s largest producers of corn ethanol). Abnormally cold winters in recent years and a propane shortage in 2014 provided a further boost to the company’s earnings. LNT Normalized Diluted EPS (Annual YoY Growth) data by YCharts Q1 earnings Alliant Energy reported mildly disappointing Q1 earnings results at the end of Q1 that missed on both lines despite the presence of favorable operating conditions during the quarter. Revenue fell by 5.8% YoY from $952.8 million to $897.4 million, missing the consensus estimate by $10.7 million. The decline compared to the previous year was attributable to a combination of lower energy prices following last autumn’s big price decline and the presence of weather during the quarter that was warmer than in Q1 2014, albeit still colder than the long-term average. The company’s consolidated electric revenue fell by 0.6% YoY while its natural gas revenue dropped a substantial 17.6% over the same period. Electric sales volume declined by 2.9% YoY as the previous year’s propane shortage, which caused many customers to temporarily switch to electric heaters, disappeared, while natural gas sales volume decreased by 10.4%. Overall Q1’s weather was “only” 10% colder than the long-term average as compared to 20% colder than the long-term average in Q1 2014. The company’s operating income fell by only 0.8% YoY despite the revenue drop due to a 9.6% decrease to fuel costs resulting from low coal and natural gas prices. Net income fell to $96.6 million from $108.0 million the previous year. This resulted in diluted EPS of $0.87 versus $0.97 the previous year, missing the consensus estimate by $0.04. The EPS contained a mixed bag of information for the company’s investors. The relatively warm weather compared to the previous year reduced the result by $0.08, although it would have been lower still by another $0.04, had temperatures been closer to the long-term average. Changes to Alliant’s purchased power agreements boosted EPS by $0.13 compared to Q1 2014, however. IPL was a strong performer during the quarter, increasing its share of the company’s consolidated diluted EPS from 40% the previous year to 49%; WPL’s share fell to 46% from 51% over the same period. The strong quarterly performance caused Alliant’s balance sheet to strengthen as its operating cash flow increased by 7.2% YoY to $314.7 million. It ended the quarter with cash of $97.6 million and assets of $12.1 billion, up YoY in both cases from $14.5 million and $11.1 billion, respectively. The company’s balance sheet is not prone to the volatility experienced by those of many of its peers due to the very hot weather commonly experienced in its service area during Q2, with 170 degree temperature swings (including wind chill and heat index) not being unheard of in Iowa between Q1 and Q3. Even accounting for this relative lack of seasonality compared to those utilities that only experience earnings boosts either in Q1 (in northern geographic regions) or Q3 (in southern geographic regions), Alliant’s balance sheet still strengthened noticeably, with its current ratio improving to 0.9 from 0.68 in Q1 2014. The company has a moderate amount of long-term debt on its books at $3.6 billion, although this is available at low interest rates due to its very good credit rating (ranging from BBB+ to A). Management felt comfortable enough with its financial position in the quarter to increase the company’s quarterly dividend by an impressive 8.5% to $0.55, representing a forward yield of 3.7% at the time of writing. Alliant Energy Financials (non-adjusted) Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Revenue ($MM) 897.4 804.1 843.1 750.3 952.8 Gross income ($MM) 427.5 397.5 476.5 385.7 438.1 Net income ($MM) 96.6 60.0 153.3 61.8 108.0 Diluted EPS ($) 0.87 0.54 1.38 0.56 0.97 EBITDA ($MM) 266.5 206.2 311.9 218.7 271.9 Source: Morningstar (2015) Outlook Alliant Energy’s short-term outlook is bright, although weather-related impacts could provide a headwind (this is very uncertain at this time, however). With a substantial cash reserve, $934 million in available liquidity from existing credit facilities, and pending asset sales, Alliant will have no difficulty financing its near-term planned capital expenditure. This will reach $1 billion in FY 2015, including $300 million in new capacity investments. Management reaffirmed its FY 2015 diluted EPS guidance of $3.45 to $3.75 during its Q1 earnings call which, in addition to representing a 4% increase over its FY 2014 earnings if the middle of the range is achieved, would also provide sufficient operating cash flow to proceed with the company’s planned capital expenditures. This capex in turn will drive rate base growth of 4% and 6% CAGR for IPL and WPL, respectively, through FY 2017. Given Alliant’s current favorable allowed ROEs of 10% and 10.4% for IPL and WPL, respectively, plus a sharing mechanism for WPL ROEs of up to 11.4%, management’s goal of 6% EPS growth will be achievable. The main short-term risk that Alliant Energy faces to its short-term earnings growth is presented by the prospect of El Niño conditions during the coming winter. These conditions are expected to begin manifesting themselves this autumn and, if pronounced enough, they could push the polar jet stream during the winter further north than usual. This would result in warmer weather across the company’s service area during Q4 2015 and Q1 2016, reducing demand for natural gas and, to a lesser extent, electricity. Furthermore, the lack of temperature fluctuations could also reduce the availability of wind power in the Central Plains, possibly extending to Alliant’s wind capacity. Weather forecasts are notoriously inaccurate – to quote Niels Bohr, “Prediction is very difficult, especially about the future” – so investors certainly shouldn’t assume that Alliant’s earnings will weaken this winter. It is a risk to consider, however. In the longer term, however, Alliant’s management has laid out a convincing path to continued steady earnings growth. The economies in its service area continue to exhibit the kind of strength that would make many regions of the U.S. jealous, with Iowa, Minnesota, and Wisconsin all reporting unemployment rates that are well below the U.S. average (see figure). While corn ethanol’s saturation of the U.S. transportation fuel market and a lack of substantial population growth means that natural gas demand in the Midwest is unlikely to increase in the coming years, the presence of continued U.S. blending mandates means that it is unlikely to weaken either. This will support the company indirectly as well in the form of electricity income, as the agricultural/food processing sector was responsible for fully 29% of IPL’s electric sales and 9% of WPL’s electric sales in FY 2014. Iowa Unemployment Rate data by YCharts A combination of weakness in the natural gas market and regulatory opposition to coal at the federal level will support Alliant’s rate base case moving forward as well by making new gas-fired capacity competitive with old coal-fired capacity. Likewise, regulatory opposition to coal will also make wind power more attractive as well. The company, which already has 1,168 MW of wind power, intends to double this by 2028 until wind capacity exceeds that of coal. It is also experimenting with solar power, although that is not as attractive as wind in the upper Midwest. Alliant will be able to make a convincing argument to the relevant state regulators that continued investments in new capacity will not just be necessary to comply with federal regulations but also to deliver the cheapest electricity to consumers, with the subsequent capex supporting rate base increases and earnings growth. Valuation Analyst estimates for Alliant Energy’s future earnings have held relatively steady over the last 90 days due to management’s guidance being reaffirmed at the end of Q1. The FY 2015 and FY 2016 consensus diluted EPS estimates have both increased slightly from $3.62 and $3.82 to $3.63 and $3.83, respectively. Based on the share price at the time of writing of $58.63, Alliant’s shares have a trailing P/E ratio of 17.4x and forward ratios of 16.2x and 15.3x, respectively. All three of these ratios are approximately in the middle of their respective 4-year ranges (see figure), suggesting that the company’s shares are fairly valued at present. LNT PE Ratio (TTM) data by YCharts Conclusion Alliant Energy has benefited over the last several years from operating in a service area with a stronger-than-average economy backed by a resilient farming sector and plentiful wind power. The company’s shares are not undervalued at present despite recent sector weakness, although they do present potential investors with an attractive earnings growth opportunity due to Alliant’s supportive regulatory structure and compelling long-term rate base growth argument. The company’s share price has historically tracked its quarterly earnings, however, and I believe that a more attractive buying opportunity could arise in the event that strong El Niño conditions result in warmer winter weather and diminished wind power in Q4 and Q1. Alliant Energy is one of the regulated utilities sector’s stronger offerings in either case. 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.

Wisconsin Energy’s 3.93% Yield: A 5-Year High

Summary Wisconsin Energy has demonstrated strong growth in earnings and dividends. The pending acquisition of Integrys moves WEC from a $15 billion utility to a $24 billion utility. The combined company will have 1.5 million electric customers and 2.8 million gas customers. The just-announced 8.3% dividend increase is in addition to the 8.3% increase earlier in 2015. The current yield (based on the newly indicated $1.83 annual dividend) is in its upper historic range. Wisconsin Energy Corporation (NYSE: WEC ) provides electric and natural gas service to customers in areas of Wisconsin and the Upper Peninsula of Michigan. Total assets are about $15 billion. WEC was formed in 1987 but its predecessor companies date to the founding of the Milwaukee Electric Railway and Light Company in 1896. The Enterprise The company currently operates three subsidiaries. We Energies is the utility enterprise that operates under the trade names of Wisconsin Electric Power Company and Wisconsin Gas LLC. W.E. Power LLC designs, builds, and owns power generating plants. It is involved in various projects, including generating stations, wind developments, and quality control systems. WISPARK is a full-service real estate development company. In the past, WISPARK developed master-planned business parks, including more than twelve million square feet of buildings Southeastern Wisconsin. Currently, WISPARK develops real estate projects that support and complement key programs of Wisconsin Energy Corporation and the development efforts of communities within WEC’s utility service territories. Acquisition of Integrys The current big story at Wisconsin Energy is the pending acquisition of Integrys Energy Group Inc (NYSE: TEG ). This will expand WEC’s service area to include parts of Minnesota, southern Michigan, and northeastern Illinois. The acquisition is introduced on the WEC website : Wisconsin Energy Corp. and Integrys Energy Group Inc. have entered into a definitive agreement under which Wisconsin Energy will acquire Integrys in a transaction valued at $9.1 billion. Upon completion of the transaction, the combined company will be named WEC Energy Group, Inc. The combination of Wisconsin Energy and Integrys brings together two strong and well-regarded utility operators with complementary geographic footprints to create a larger, more diverse Midwest electric and natural gas delivery company with the operational expertise, scale and financial resources to meet the region’s future energy needs. This acquisition will increase WEC assets from $15 billion to $24 billion. The WEC website has a concise fact sheet that describes the two companies. Here is a summary: Integrys shareholders to receive $71.47 in stock and cash Integrys shareholders will receive a total consideration of $71.47 per share, in the form of 1.128 Wisconsin Energy shares plus $18.58 in cash (74% stock and 26% cash). After the acquisition, former Wisconsin Energy shareholders will own 72% of the company and former Integrys shareholders will own 28%. WEC CEO Gale Klappa will serve as chairman of the combined companies. Corporate headquarters will be in metro Milwaukee, with operating headquarters in Chicago, Green Bay and Milwaukee. The new company will have more than 1.5 million metered electric customers and 2.8 million metered natural gas customers. The resulting company will operate seven regulated electric and natural gas utilities across Wisconsin, Illinois, Michigan and Minnesota. It will be the 8th largest natural gas distribution company in the U.S. The combined entity will be committed to accelerated investment in Integrys territories, including their 5-year plan to invest up to $3.5 billion in infrastructure and operational initiatives. Three Criteria for Evaluating Potential Acquisitions In the WEC Q1 2015 conference call , CEO Gale Klappa reminded participants that on June 23, 2014, WEC announced plans to acquire TEG. He said the deal meets or exceeds the three criteria that WEC uses to evaluate potential acquisition opportunities: First, we believe the acquisition will be accretive to earnings per share in the first full calendar year after closing. Of course, that would be 2016. Second, we believe it will be largely credit neutral. And finally, we believe the long-term growth rate will be at least equal to Wisconsin Energy’s standalone growth rate. Combined Companies Klappa elaborated about plans for the combined companies: We expect the combined company will grow earnings per share at 5% to 7% per year, faster than either of us is projecting on a standalone basis with more than 99% of those earnings coming from regulated businesses. Our customers will benefit from the operational efficiency that comes with increased scale and geographic proximity. And over time, we’ll enhance the operations of the seven utilities that will be part of our company by incorporating best practices system-wide. We believe that customers could actually see as much as $1 billion of savings over the next 10 years through a combination of lower capital and operating costs in Wisconsin. In addition, Integrys today, as you may recall, owns a 34.1% interest in American Transmission Company. Wisconsin Energy owns 26.2%. That means the combined entity will have a 60% stake in one of the largest independent transmission companies in the United States. WEC has a strong history of making successful “bolt on” acquisitions. The purchase of Integrys appears to be a logical fit. The projected $.4575 quarterly dividend is an 8.3% increase The companies appear to be on target to complete the transaction in the next few weeks. In a June 12, 2015 news release , WEC declared a pro rata dividend of $0.00459239 per share per day that will accrue from May 15, 2015, through the day before the effective date of the acquisition. This is the daily equivalent of WEC’s $.4225 per quarter dividend. It would be payable to WEC shareholders of record at the close of business on the day preceding the effective date of the acquisition. The WEC board also declared a pro rata dividend of $.00497283 per share per day (the daily equivalent of the new $.4575 quarterly dividend) from the date of the acquisition through August 14, 2015, which is WEC’s normal record date. The pro rata dividend would be paid on September 1, 2015 to shareholders of record on August 14, 2015. According to the press release: This new dividend level represents an increase of 8.3 percent over the current quarterly rate for Wisconsin Energy shareholders and – per the merger agreement – will bring Integrys and Wisconsin Energy shareholders to dividend parity. These pro rata dividend declarations are contingent on completion of the acquisition prior to Aug. 15, 2015. In the event that the acquisition does not close by that date, Wisconsin Energy shareholders of record on Aug. 14, 2015, will receive the regular quarterly dividend of $0.4225 a share, payable Sep. 1, 2015. Wisconsin Energy expects that in future years the projected payout target for the combined company will be 65-70% of earnings. Leadership Gale E. Klappa is the Chairman and Chief Executive Officer of Wisconsin Energy Corporation and Chairman, President and Chief Executive Officer of We Energies. He has held these roles since May 2004. He joined WEC as president in April, 2003. Prior to joining Wisconsin Energy, Klappa was executive vice president, chief financial officer and treasurer of Southern Company (NYSE: SO ). Previous positions at Southern included chief strategic officer, the North American group president of Southern Energy Inc. (now Mirant), president and CEO of South Western Electricity, SO’s electric distribution utility in the United Kingdom, and senior vice president of marketing for Georgia Power Company, a Southern subsidiary. Klappa is a 1972 graduate cum laude of the University of Wisconsin-Milwaukee, with a bachelor’s degree in Mass Communications. His excellent communication skill and his “radio voice” make for enjoyable and informative listening to corporate presentations such as quarterly earnings calls. Electric Light & Power magazine named Klappa CEO of the Year in January 2012, recognizing his role in executing the company’s Power the Future plan. This plan added 50 percent more generating capacity to the company’s operating fleet while cutting emissions of sulfur dioxide, nitrogen oxide and mercury by 80 percent. In September 2012, Corporate Responsibility magazine named Klappa Responsible CEO of the Year for his commitment to transparency, accountability and customer satisfaction. Allen L. Leverett has been president of WEC since August, 2013. He has served as president and CEO of We Generation, the company’s power generation group, since March 2011. Leverett has overall responsibility for Wisconsin Energy’s electric generation portfolio, fuel procurement, environmental compliance and renewable energy development strategy. Leverett joined WEC in 2003 as chief financial officer. J. Patrick Keyes has been executive vice president and chief financial officer of WEC and We Energies since September, 2012. He joined WEC initially as vice president and treasurer in April, 2011. Strong Dividend Growth David Fish lists Wisconsin Energy is a Dividend Contender with twelve consecutive years of dividend increases. David cites the following dividend growth rates (which do not include the just-announced 8.3% dividend increase): 1-year 8.0% 3-year 14.5% 5-year 18.2% 10-year 14.2%. Earlier in 2015, the quarterly dividend was raised 8.3% from $.39 to $.4225 per share (pay date 3/1/15), for an annual dividend of $1.69. The just-announced 8.3% dividend increase will raise it to $.4575 per share, for an annual dividend of $1.83. At the June 19, 2015 closing price of $46.58, this equates to a yield of 3.93%. WEC’s Total Dividend Return number (aka “The Chowder Rule”) is the 5-year dividend growth rate of 18.2% plus the current yield (in this case the new, or indicated yield) of 3.9%, or 22.1%. This is extraordinarily high for a utility and it reflects WEC’s stated policy of increasing the payout percentage to be more in line with peers. Therefore, since the payout ratio is now approaching the company’s target of 65-70% of earnings (as stated above), one would expect the dividend growth rate to moderate in the years ahead. In fact, one can see this already in the declining rate figures for 1-year and 3-year, compared with the 5-year rate. How did I find Wisconsin Energy? I was introduced to Wisconsin Energy through Seeking Alpha. WEC kept appearing in the comment threads of many Seeking Alpha articles about utilities and I read a few articles about WEC. In 2012, Larry Smith wrote one article about WEC, David White wrote two articles, and Saibus Research wrote seven articles. It’s quite likely that I glanced at some of these articles, but I did not immediately give WEC a serious look because the yield always seemed too low to merit further consideration. At some point, I began to notice WEC’s exceptionally strong growth in earnings per share and in their dividend. Through a quarterly earnings transcript or webcast, I became aware of the company’s commitment to grow the dividend. That was when I realized that the reason the yield always seems low is because the market gives WEC a premium valuation. The market is rewarding WEC for its strong growth. A lesson learned: Don’t stop looking at a company just because the yield seems too low. Look first at the growth of earnings per share and the dividend. My first conscious memory of giving serious consideration to WEC was after reading Ong Kang Wei’s March 21, 2013 article, Wisconsin Energy: A High Growth, Fundamentally Strong, Low Beta Pick For My Dividend Portfolio . I became convinced that I wanted to add WEC to the portfolio. The key factors were: 1) Impressive leadership, beginning with CEO Gale Klappa; 2) Strong growth in earnings; 3) Strong growth in the dividend; 4) Consistently high marks for WEC everywhere I turned. Still, I didn’t make the first purchase until nine months after reading Kang’s article. I made these purchases of WEC shares: December 31, 2013, at $41.24; December 30, 2014, at $53.70; March 4, 2015, at $49.80; June 1, 2015, at $48.35; June 10, 2015, at $45.16, and June 19, 2015, at $46.68. The average price was $48.31. In retrospect, I made a mistake by making a large purchase on December 30, 2014, which elevated the average price. (When the utility sector kept roaring higher, I trimmed 9% of the stake on January 27, 2015, at $57.28.) Currently, WEC is 5.8% of my retirement income portfolio. Financial Data Here are some key metrics from Morningstar via BetterInvesting.org : Common shares outstanding: 225.5 million Long Term Debt: $4,169.2 million Total Debt: $5,159.0 million Total Capital: $9,669.6 million Long Term Debt as a Percentage of Capital: 43.1% 52-week High: $58.01 52-week Low: $41.90 Annual Financial History Fiscal Year 12/31 2010 2011 2012 2013 2014 Sales (millions) 4202.5 4486.4 4246.4 4519.0 4997.1 Pre-tax Profit 505.9 776.7 852.6 915.3 950.0 Net Income 454.7 513.2 547.1 576.5 588.3 Earnings Per Share 1.92 2.18 2.35 2.51 2.59 The 5-year growth rate: Sales 3.6%; Earnings Per Share 7.6%. Price/Earnings History and Valuation Trends FY Hi Price Lo Price EPS Hi P/E Lo P/E Div Payout Hi Yld 2010 30.3 23.4 1.92 15.8 12.2 .80 41.7% 3.4% 2011 35.4 27.0 2.18 16.2 12.4 1.04 47.7% 3.9% 2012 41.3 33.6 2.35 17.6 14.3 1.20 51.1% 3.6% 2013 45.0 37.0 2.51 17.9 14.8 1.45 57.6% 3.9% 2014 554 40.2 2.59 21.4 15.5 1.56 60.3% 3.9% Average P/E Ratio: 15.8 Current P/E Ratio: 18.4 Interpreting the data The trends for earnings per share and annual dividend are up. The company has intentionally raised the payout ratio to be more in line with other utility companies. The market has consistently given a premium to WEC shares. Three times in the last five years the yield has approached 4.0%, only to see the stock price be bid up by investors. The 5-year market price trend reflects the bull market we have seen, as does the steadily rising P/E ratios. The high price thus far in 2015 was $58.01. The data confirm that WEC is what Chuck Carnevale would call a “premium value” stock. WEC’s consistent growth in earnings and dividends has resulted in a consistently escalating stock price. The challenge in purchasing shares of Wisconsin Energy (soon to be known as WEC Energy Group, Inc) is not to overpay. I overpaid with the 12/30/14 purchase. The current price of $46.58 reflects several dynamics of the market place. The utility sector has cooled off in recent weeks, most likely in anticipation of less accommodation by the Federal Reserve to keep interest rates low. The proposed purchase of Integrys has moved through the regulatory approval process with good speed. The companies are preparing to complete the transaction this summer. There may be some “wait and see” hesitancy within the investment community (either that the deal may be delayed or blocked at the last minute, or that the deal may be not be as good for WEC as company management has maintained). The long anticipated but just-announced dividend increase may not be fully reflected in the stock price. For whatever reason(s), WEC is 19.7% off its 52-week high. Investment thesis As an exercise in personal discipline, beginning with this article, I intend to write approximately one article per week about each of the companies in my retirement income portfolio. Part of this is a journal-like, one-paragraph investment thesis statement describing why I own shares of each company. Here’s that paragraph: Wisconsin Energy is the most impressive utility company I have studied. The key elements of this are strong management, an excellent service record, a history of successful bolt-on acquisitions, clear goals and operational transparency, good growth in earnings per share, exceptional dividend growth, and a clearly stated dividend policy. The high yield for the past five years has ranged from 3.4% to 3.9%. Thus, as funds are available, I will consider buying WEC when the yield approaches 4.0%. WEC is my first choice in the utility sector. My goal for this investment is to watch the pending acquisition of Integrys to see if WEC can continue its good history of successfully integrating acquired companies; to monitor management for signs of leadership transition plans (Klappa appears young and energetic, but he is older than I am); and for WEC to be in my “second group of four,” with a target portfolio allocation for WEC of 5.75%. (You can read more about that below in the portfolio review.) What could go wrong, or prompt a sale? The risks include adverse change in management, deteriorating earnings, change in dividend philosophy and policy, a shift to a more difficult regulatory environment, unexpected problems with integrating TEG into the combined operations. If I were initiating a position now, my target would be $46.33 (a 3.95% yield at the new indicated dividend of $1.83). Since WEC is already well represented in the portfolio, my target buy price for adding more shares is $44.68 (4.1% at the new indicated dividend). My target price for trimming some shares is $62.03, (a 2.95% yield at the new rate). Portfolio review I have tried to design my retirement income portfolio around “four groups of four,” that represent my top sixteen priority holdings: 1) JNJ, MMM, PEP, and WPC, with a target allocation of 6.0% each; 2) GPC, EMR, O, and WEC, with a target allocation of 5.75% each; 3) PG, T, IBM, and STWD, with a target allocation of 5.5% each; 4) NNN, HCP, NWN, and VTR, with a target allocation of 5.0% each. A fifth group is composed of DLR, HTGC, HASI, EVA, PEGI and (yet to be purchased) MAIN. Below is my Retirement Income Portfolio as of June 19, 2015. Companies are ranked by their percentage of the portfolio. “TDR” is the Total Dividend Return (aka the Chowder Rule number). “Target” is the target portfolio allocation for each stock and “Actual” is the actual percentage of each stock in the portfolio. Company Ticker Price Div Yield TDR Credit Target Actual WP Carey WPC 62.32 3.82 6.1 18.8 BBB 6.0 6.1 Pepsico PEP 94.86 2.81 3.0 10.7 A 6.0 6.0 AT&T T 34.99 1.88 5.4 7.7 A- 5.0 5.9 3M MMM 158.95 4.10 2.6 13.5 AA- 6.0 5.9 Jnsn&Jnsn JNJ 99.86 3.00 3.0 10.4 AAA 6.0 5.9 Proc&Gam PG 80.54 2.65 3.3 11.3 AA- 5.5 5.9 Realty In O 46.07 2.28 4.9 9.9 BBB+ 5.75 5.9 Wisc Energy WEC 46.58 1.83 3.9 22.1 A- 5.75 5.8 Emerson El EMR 58.11 1.88 3.2 9.0 A 5.75 5.8 Genuine Pts GPC 92.21 2.48 2.7 10.4 A+ VL 5.75 5.8 Int Bus Mach IBM 166.99 5.20 3.1 17.7 AA- 5.5 5.7 Starwood Pr STWD 22.79 1.92 8.4 nmf BB 5.5 5.4 HCP Inc HCP 37.73 2.28 6.0 9.4 BBB+ 5.0 5.2 NW Nat Gas NWN 43.42 1.86 4.3 7.2 A+ 5.0 5.0 Nat Ret Prop NNN 36.70 2.28 4.6 6.5 BBB+ 5.0 5.0 Hercules Tech HTGC 11.78 1.24 10.5 n/a BBB- 2.5 4.8 Ventas VTR 65.19 3.16 4.8 12.5 BBB+ 5.0 2.2 Hammon Arm HASI 21.31 1.04 4.9 n/a NR 2.0 2.2 Enviva EVA 19.56 1.65 8.4 n/a NR 2.0 2.0 Digital Realty DLR 67.93 3.40 5.0 24.7 BBB 2.0 1.2 Pattern Enrgy PEGI 29.95 1.37 4.6 n/a NR 1.0 1.0 Cash 1.5 1.3 This article is the journal of my retirement income portfolio. It is not intended as a recommendation to buy or sell any security. This is presented to offer ideas for stocks to study and to offer a work in progress of one person’s attempt to design a portfolio of dividend-paying common stocks. Please do your own due diligence. Disclosure: I am/we are long WEC, NWN, GPC, PG, EMR, MMM, JNJ, PEP, T, HCP, NNN, O, IBM, WPC, DLR, STWD, VTR, HTGC, HASI, PEGI, EVA. (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.