Tag Archives: energy

Duke Energy And Southern Company Set To Soar In 2016

Unregulated utility companies’ performance likely to stay challenging in 2016 because of weak and volatile power prices. DUK and SO making correct strategic attempts to strengthen regulated operations. Stock valuations for DUK and SO are cheap, as both are trading at discounts to peers and the industry average. 2015 has been a tough year for the U.S. utility sector, mainly because of concerns regarding the Fed interest rate increase; the utility sector ETF (NYSEARCA: XLU ) is down 10% year-to-date. Moving into 2016, given the decline in the power and natural gas prices, U.S. unregulated utility companies’ performance will stay volatile and weak; however, I think U.S. utility companies with significant and growing regulated business operations will stay an attractive investment option for income-hunting investors. Duke Energy (NYSE: DUK ) and Southern Company (NYSE: SO ) are the two U.S. utility companies that have large regulated business operations and are further working to strengthen their regulated business operations, which will provide stability to their revenues and cash flows, and support dividend growths. Moreover, valuations for both the stocks stay compelling. Two Utility Stocks: DUK and SO In recent years, low power and natural gas prices has adversely affected performance of unregulated business operations. As the power and natural gas prices continues to stay weak, I think, 2016 will be another challenging year for the unregulated utility companies. In the volatile unregulated business environment, the U.S. utility companies are working to lower their unregulated business operations, which will positively affect their performance. DUK is among the leading utility companies of the U.S., and has been working to strengthen its regulated business operations by making regulated capital investments; the company is expected to make capital investments of $20 billion in the next four years, which will result in increase in its rate base and support earnings growth. The company is not only upgrading its existing regulated infrastructure, but also diversifying the power generation assets by focusing on renewable energy sources, which will improve its business risk profile and allow it to comply with changing environmental regulations. DUK plans to spend to $3 billion on renewable energy in the next four years. Moreover, in 2016, if the company decides to sell its international unregulated business operations, it will positively affect its stock price and will make its cash flows more stable. Also, once the company successfully closes acquisition of Piedmont Natural Gas (NYSE: PNY ), which is consistent with its efforts to grow regulated earnings, it could opt to undertake more regulated gas business acquisitions to strengthen its gas business. Given the company’s aggressive efforts to strengthen its regulated operations, its cash flows will improve, which will allow it to increase its dividend growth consistently in the coming years. The stock has yield of 4.75% , which is supported by its 14% operating cash flow yield, and makes it an impressive investment option for income investors. Also, investors should keep track of yearly earnings call in February, in which the company will provide update on its 5-year growth expectation, synergies related to PNY acquisition and rate case outlook. Southern Company is another utility stock which stays an attractive investment option for income investors, as it offers a solid yield of 4.7% , which are backed by its operating cash flow yield of 15% . The company generates almost 90% of its earnings from regulated operations, which provides stability to its cash flows. Similar to DUK, SO also is working aggressively to modernize and strengthen its power generation assets. Moreover, once the company’s two construction projects, Kemper and Vogtle Power plants, are completed it will portend well for its long-term earnings. Also, the company has been actively increasing its renewable energy asset base. The company spent more than $2 billion on renewable in 2015, and plans to spend another $1.3 billion in 2016, which is expected to increase its renewable energy portfolio capacity to 2,600 MW. Consistent with its renewable generation assets base growth, the company acquired almost 600 MW of solar assets from First Solar (NASDAQ: FSLR ). And also, completion of SO’s and AGL Resources (NYSE: GAS ) in the later half of 2016 will augur well for the stock price. The company’s efforts to improve its regulated power asset base will support its long-term earnings growth, and its business risk profile will improve, as it will complete pending acquisitions and ongoing construction projects. Also, the company’s cash flows will stay strong to support its dividend growth, which will improve investors’ confidence. Valuation and Summation Unregulated utility companies’ performance is likely to stay challenging in 2016 because of weak and volatile power prices. However, companies like DUK and SO, which are making correct strategic attempts to strengthen their regulated operations, will deliver healthy performances in future years. Both DUK and SO offer solid yields of 4.7% and 4.75%, respectively, which makes them attractive investment prospects for income-hunting investors. Moreover, stock valuations for DUK and SO are cheap, as both are trading at discounts to their peers and the industry average. DUK and SO are trading at forward P/E of 14.8x and 15.7x, respectively, versus the utility sector’s forward P/E of 16.5x .

Value Stocks Struggled This Year. Try These 3 Tips For 2016

Summary Value stocks often struggle in down markets. 2015 was a hard year for value investors. Employing these 3 simple tips may help value investors have a better 2016. Value investing is attractive because you get more for less. Well, academics won’t put it exactly that way – they might be inclined to say that you get more excess return on average for greater risk taking. What does that mean? If I get more return on average isn’t that, by definition, less risky? Portfolio123 has a value screen with common factors such as price to sales, price to book and price to earnings ratios. Since 1999 if you held the 50 top ranked value stocks in the S&P 500 and replaced these holdings weekly, the result would have been a return of 13.5% annually. Where is the risk there? Just look at the bear markets. In 2002 the S&P 500 took a turn for the worse. The blue line is the S&P 500 and the red line represents the value strategy. (click to enlarge) Wash and repeat for 2007-2009. (click to enlarge) 2015 was also a tough year for value investors. Holding the 25 highest dividend yielding stocks resulted in some ugly under-performance. (click to enlarge) Holding the 25 lowest price-to-earning ratio stocks also resulted in below average returns. (click to enlarge) If we had invested in the 25 highest ranked value stocks, according to the Portfolio123 ranking system, with a minimum 3% dividend yield, this would have been our year. (click to enlarge) It almost doesn’t matter which value factors you go for – the response for 2015 is pretty much the same – YUCK! Now I see the risk. If you are a value investor, how can you manage some of the downside risk? Here are 3 pointers that seem obvious – but that doesn’t make the advice any less beneficial. 1. Diversify. A well-worn cliche, but for a good reason. Although bear markets have a way of pulling everything down at the same time, you will still minimize the risk of being loaded into one sector that goes poof! 2. Check short interest. Check on the percentage of shares sold short (try saying those ‘shares sold short’ 3 times really fast). If short interest is high, a lot of people are betting for an additional downside loss. It may not turn out that way, and it could even flip into a short squeeze, but if you want to play it safe stay away from these volatile tug-of-wars. I prefer stocks with short interest of 2% or less. 3. Get less active. When things go wrong it is only natural to want to fix it. So you sell your value stocks in order to buy different value stocks with an even better earnings or dividend yield. Those stocks tank so you jump ship and try again. You need to slow it down! Profits can compound when things go right but losses compound when things go wrong. When in doubt – stop. Wait. Ride it out. Don’t try to fix it. Value Investing 2015 Re-visited Let’s add the first 2 of these simple guidelines into our trading system (top 25 value stocks in the S&P 500 with minimum 3% dividend yield) to see what effect it would have had in 2015. We add a rule that says no more than 1.5% short interest and a maximum of 3 stocks per sector. (click to enlarge) That’s a bit more palatable. The lesson I am taking with me into 2016 is to slow things down, keep an eye on short interest and yes – as we’ve been told before – diversify. Here is a sampling of a few dividend value stocks that would currently meet the above criteria. Ticker Name Value Rank MktCap SectorCode PEInclXorTTM ProjPECurFY Yield (NYSE: MET ) Metlife Inc. 99.8 54634.58 FINANCIAL 9.52 9.77 3.06 (NYSE: WRK ) WestRock Co 95.19 11788.59 MATERIALS 14.38 13.11 3.27 (NYSE: ETN ) Eaton Corp Plc 92.18 24565.42 INDUSTRIAL 12.29 12.53 4.14 (NYSE: ADM ) Archer-Daniels-Midland Co 82.36 22291.09 STAPLE 12.88 13.64 3.02 (NASDAQ: CSCO ) Cisco Systems Inc 77.35 141127.14 TECH 14.93 12.22 3.02 (NYSE: DTE ) DTE Energy Co 64.53 14616.53 UTIL 15.4 16.95 3.59 (NYSE: VZ ) Verizon Communications Inc 59.72 192091.5 TELECOM 18.81 11.9 4.79 If you are a value investor, what is your approach for 2016?

American Electric Power Raises Dividend 5.7%… What Now?

Summary For a utility, AEP’s record of dividend hikes is impressive. However, I suspect growth will be smaller in coming years as the ‘shale boom’ comes to a screeching end. At this time, I believe it’s best to stay on the sidelines on AEP. As a dividend investor, I tend to like utilities. But ‘climate change legislation’ has kept me away from most utilities. Solar and wind energy are expensive relative to fossil fuels. While utilities may ultimately pass those costs on to consumers, utility companies will have to invest a lot of money into new transmission and generation infrastructure. That means lots of new debt, with no significant demand growth: A very bad combination. When I look for utility companies, I look for ones that operate in states which have minimal or no ‘renewable energy mandates.’ I therefore tend to stick with US-based utilities because the US has some of the most reasonable energy policies of the developed world. I also tend to stick with select states where mandates are the lowest. American Electric Power (NYSE: AEP ) is one of the utilities I like. It operates mostly in Ohio, West Virginia, Texas and Oklahoma. While AEP has been increasing its renewable share of power, the numbers remain quite reasonable. Have a look. (click to enlarge) Courtesy of AEP Investor Relations. Even by 2026, only 15% of AEP’s total generation will be from ‘renewable’ energy sources. That’s pretty good. Of all the country’s utility providers, AEP’s generation is among the most economical. Back on November 6th, AEP paid a dividend of 56 cents, which is 5.7% higher than the previous quarterly dividend. For a utility, that’s quite an impressive growth record. That dividend growth has been mirrored by earnings growth. Between last year, this year and next year, AEP expects 4%-6% earnings growth, and the company is making good on that promise thus far. (click to enlarge) Courtesy of AEP Investor Relations. Where is that growth coming from? Well, it’s coming from capital investment, ‘rate recovery’ from investment in fully-regulated assets, and also cost savings. Each account for a good part of AEP’s earnings growth. Courtesy of AEP Investor Relations. A big advantage that AEP has lies in its location. AEP operates in the Eagle Ford, Permian, Marcellus and Utica shales. These territories have been hot-spots for growth over the last few years. Have a look. Courtesy of AEP investor relations. As you can see, industrial load growth in shale areas has far outpaced the rest of the company’s industrial base (and, indeed, the rest of the country in general), even though crude prices have fallen by 60% and rig counts have dropped by over half. This juxtaposition exists because the number of wells drilled per rig has increased dramatically, and the build out of midstream infrastructure has lagged behind the drop in activity. So, does the ‘shale boom’ live on? I don’t think so. Judging from both the comments and actions of OPEC kingpin Saudi Arabia, it really looks as if crude oil prices are going to stay low. But will production in these regions continue to remain stubbornly high? I really don’t think so. In 2016, the hedges of most shale-based E&Ps will roll off. This will ultimately lead to smaller lines of credit, and much less access to capital for these E&Ps (junk bond yields have risen sharply). With credit markets squeezed, I believe that small-sized and even medium-sized shale drillers will find it difficult to continue drilling at some point next year. Energy activity is lagging behind the oil price, but that drop is already coming. Therefore, I really believe that AEP will find it shale-area industrial growth coming to a halt next year. There’s a good chance it could even go negative. Courtesy of AEP Investor Relations. In fact, we can already see that industrial sales growth in shale regions has already pulled back significantly over the last few quarters. Expect much more of this. All things considered, earnings growth is probably going to slow down as a result of this. By how much is difficult to estimate. However, as the energy crisis deepens and takes a bite out of the economies of Texas, Ohio and Oklahoma, overall employment and GDP numbers in AEP’s service areas will underperform the rest of the country. In fact, that’s already begun to happen. (click to enlarge) Courtesy of AEP Investor Relations. Overall, AEP’s total electricity sales are scheduled to increase 0.6% in 2015, and that should translate to 4%-6% earnings growth. Next year, and indeed the years after, will be more challenging as long as crude oil prices remain low. While low oil prices are good for the country as a whole, they do effect AEP’s service areas. That is apparent when looking at the above right chart, where ‘AEP West’ represents both Texas and Oklahoma. Going forward I expect to see considerably slower EPS growth; perhaps something more like 2% or even less, because AEP’s operating territory is about to be hit hard, especially Texas. Overall, AEP will be fine because it is a diversified, regulated utility, but the company’s engine of growth is going to peter out soon. Therefore, I expect tamer dividend growth going forward. Is AEP a buy? Is AEP worth buying here? I would be cautious on this. According to data from FAST Graphs, AEP’s ten-year average price-to-earnings ratio is 13.7 times, but right now the company trades at 15.8 times. As a utility, AEP is also somewhat exposed to higher interest rates. If bonds trade lower, chances are AEP will follow. Right now, as with many stocks, caution is warranted with AEP. Those wanting to pick up a utility should instead look at Entergy Corp (NYSE: ETR ), which is benefiting from the petchem boom along the Louisiana and Texas coasts. That growth story is still somewhat intact.