Tag Archives: energy

How To Invest ‘Fossil-Free’ With This New ETF?

Pollution and global warming are now blazing issues, raising panic alarms from pole to pole. The louder the moan of panic, the faster the human awareness toward protecting the environment wakes up. The tendency to save the environment and be socially responsive seems to be an order of the day. The financial world also appears to be embracing the theme, which is why a surge in eco-friendly and socially conscious ETFs are now prevalent. One can have a fair understanding of this intention looking at the different areas of the ETF industry. There are clean-energy ETFs, low-carbon ETFs and even environment-oriented ETFs at investors’ disposal. Most recently, the market has received a new environment-pro ETF namely Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ) from the investment management company Etho Capital in partnership with Factor Advisors. How Does ETHO Work? ETHO follows “an equally weighted all-cap equity index that selects the most carbon-efficient companies across industries. The index is completely divested of fossil fuel companies, as well as those in tobacco, weapons and gambling, and undergoes rigorous screening with expertise from global NGO partners and based on ESG (environmental, social and governances) performance data,” as per the issuer . To accomplish the objective, the index studies total greenhouse gas emissions from over 5,000 equities to choose ‘climate leaders’ in each industry. The index rules out all companies operating in the field of oil, natural gas and coal. Any industry with weak ESG standards does not get an entry to the index followed by ETHO. To add to this, experts’ views related to socially responsible investing are also considered in the stock selection. This results in a 400-stock portfolio having a carbon emissions profile that is 50-70% lower per dollar invested than a conventional broad-based benchmark. No stock accounts for more than 0.56% of the basket. Netflix (NASDAQ: NFLX ), M&T Bank Corp. (NYSE: MTB ) and Energy Recovery Inc. (NASDAQ: ERII ) are top three holdings of the fund, which charges 75 bps in fees. How Could it Fit in a Portfolio? Building a ‘low-carbon’ economy and fighting global warming have become a common theme among the most developed and emerging nations. Recently, China announced that it intends to build a pollution-free environment. And, as part of this mission, the president of China and the U.S. president Barack Obama struck a deal to lessen carbon emissions. The agreement calls for carbon emission reductions by 26% to 28% in the U.S. by 2025. It also includes the first-ever commitment by China to stop emissions from growing by 2030. President Obama has always been active in cleaning up carbon pollution. A proposed Environmental Protection Agency rule seeks to reduce 30% carbon emission from power plants by 2030, compared to the levels in 2005. As per ETHO press release , in September 2015, it was declared that institutions and individuals managing over $2.6 trillion in assets under management are to divest fossil fuel. This figure is likely to go up, as 84% of the millennials support the ESG theme in investing, and close to $41 trillion will move to millennials from baby boomers in the coming 35 years, per the issuer. In short, this ETF can be a great tool to invest in amid the fast-growing awareness of clean energy. In any case, the overall energy sector has been in a lull lately on steeply declining prices, giving investors one more reason to bet on this new ETF. President Obama’s refusal to the planned Keystone XL pipeline and the New York attorney general’s new investigation of Exxon Mobil (NYSE: XOM ) for confusing the public about the impact of climate change also hint at the underlying risks associated with fuel-related investing, per the issuer. By investing in ETHO, investors can also avoid such threats. Competition The competition in this space is negligible with a handful of products sharing the carbon-efficiency theme. There are two low-carbon funds in the market namely The SPDR MSCI ACWI Low Carbon Target ETF (NYSEARCA: LOWC ) and iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ). The nature of these two funds is not exact to ETHO as the duo has global footprint, while the newbie revolves around U.S.-based companies. Since the operating methodology of ETHO is a little different to both low-carbon ETFs, ETHO should not face direct competition from them. However, the duo charges just 20 bps in fees, much lesser than ETHO, which could be a deterrent in amassing investors’ assets for the latter. Original post .

Dividend Growth Stock Overview: NextEra Energy

About NextEra Energy NextEra Energy (NYSE: NEE ) generates, distributes and sells electricity to customers in 27 states and Canada. The bulk of the company’s customers are in Florida, served by its subsidiary Florida Power & Light Company. In addition to Florida Power & Light, NextEra Energy operates subsidiaries that generate renewable energy, provide electricity service to locations in Texas and New Hampshire, and sell fiber optic telecommunications services around the United States. The company employs nearly 14,000 people, and is headquartered in Juno Beach, Florida. Nearly 5 million customers are served by Florida Power & Light, which has 25,100 megawatts (MW) of electrical generation capacity. Over 90% of FPL’s capacity comes from natural gas and nuclear power. Based on 2014 figures (the latest year that’s available), over half of the operating revenues come from residential accounts, and another 36% come from commercial accounts. While wholesale revenues account for only 3% of the total, wholesale revenues were negligible as recently as 2012. NextEra Energy prides itself on using renewable power generation sources, and its promotional materials tout this effort; however, FPL’s two solar generation facilities provide only 35 MW of capacity. The company’s other major subsidiary is NextEra Energy Capital Holdings, Inc., which owns NextEra Energy Resources (NEE Resources) and NextEra Energy Transmission, LLC (NEET). NEE Resources is a wholesale generator of power and operates NextEra Energy’s competitive energy businesses (as opposed to its rate-regulated businesses). It also conducts energy-related commodity marketing and trading activities to mitigate risks from fluctuations in energy prices. NEET owns and operates two subsidiaries of its own, Lone Star and NHT, which provide rate regulated electricity service in parts of Texas and New Hampshire, respectively. NEET also owns FPL FiberNet, which leases internet network capacity to customers in Texas, New Hampshire and parts of the south-central United States. In 2014, NextEra Energy posted total income of nearly $2.5 billion on revenues of $17.0 billion. 60% of the total income was provided by Florida Power & Light, with the remaining 40% coming from NEE Resources. Earnings per share were $5.60 in 2014; NextEra Energy recently reaffirmed full-year 2015 earnings in the upper half of a range of $5.40-5.70, which translates into a year-over-year increase of between 1% and 2%. Based on the current dividend of $3.08, the company’s payout ratio is 56%. It expects to compound EPS at 6-8% a year through 2018, and is projecting EPS of $5.85-6.35 in 2016 and $6.60-7.10 in 2017. NextEra Energy has a share repurchase program that was authorized in February 2005 and reaffirmed in July 2011. Its repurchase activity is sporadic. The initial authorization in 2005 was for 20 million shares, and over a decade the company has repurchased less than 7 million shares. As of December 2014, 13.3 million shares, representing 2.9% of the outstanding shares, remained on the program. The company is a member of the S&P 500 index and trades under the ticker symbol NEE. As a member of the S&P 500, once NextEra Energy has increased dividends for 25 consecutive years, S&P will classify the company as an S&P Dividend Aristocrat. Given that NextEra has made a conscious effort to increase its dividend each year for 21 years straight, I expect the company to continue to do so. This would put it on track to become a Dividend Aristocrat at the beginning of 2020. NextEra Energy’s Dividend and Stock Split History (click to enlarge) NextEra Energy has compounded its dividend at 8% over the last decade. It has paid dividends since at least 1983, and has increased them since 1995. The company announces annual dividend increases in mid-February, with the stock going ex-dividend at the end of February. In February 2015, NextEra Energy announced a 6.2% dividend increase to an annualized rate of $3.08 per share. The company should announce its 22nd consecutive annual dividend increase in February 2016. Historically, NextEra Energy has increased dividends in the mid-single digits, but over the past few years, it has increased the growth rate. Over the last 5 years, it has compounded its dividend at 9.02%, while over the past 10 and 20 years, the company has compounded the dividend at 8.05% and 6.46%, respectively. The company has split its stock twice. The splits, both 2-for-1, occurred in January 1985 and March 2005. A single share purchased prior to January 1985 would have split into 4 shares. Over the 5 years ending on June 30, 2015, NextEra Energy stock appreciated at an annualized rate of 19.0%, from a split-adjusted $46.00 to $95.23. This outperformed the 15.0% compounded return of the S&P 500 index over the same period. NextEra Energy’s Direct Purchase and Dividend Reinvestment Plans The company has both direct purchase and dividend reinvestment plans. You must already be an investor in NextEra Energy to participate in the plans; if you own the stock in your brokerage account, you’ll have to have it transferred into your name in order to join the plans. The minimum investment for additional direct purchases is $100, and the dividend reinvestment plan allows for full or partial reinvestment of dividends. The plans’ fees structures are favorable for investors. Depending on the source of the shares purchased – and, unfortunately, you’ll have no control over that – you’ll pay a maximum of 3 cents per share purchased if they’re purchased off the open market; there’s no charge if the shares are purchased directly from NextEra Energy. When you sell your shares, you’ll pay a transaction fee of either $15 or $25 (depending on the type of sell order) plus a commission of 12 cents per share. You’ll also get charged an additional $15 if you go through a phone agent to sell your shares. All fees will be deducted from the sales proceeds. Helpful Links NextEra Energy’s Investor Relations Website Current quote and financial summary for NextEra Energy (finviz.com) Information on the direct purchase and dividend reinvestment plans for NextEra Energy Disclosure: I do not currently have, nor do I plan to take positions in NEE.

Exelon Corp. Is A Buy

Summary EXC has a low beta which will help during potential market downturns. EXC underfunded pension liability offers a “negative earnings duration” which will benefit from rising rate environment. Forward dividend yield of 4.48% is supported by large dividend coverage ratio. Common shares are selling at a discount compared to historical valuations and peer group. Exelon Corp. (NYSE: EXC ) is a utility services holding company engaged in the energy generation and delivery business through its segments, Generation ComEd, PECO and BGE. According to the company’s website : Exelon’s family of companies represents every stage of the energy value chain. Exelon Generation is one of the largest competitive United States power generators, with approximately 32,000 megawatts of owned capacity comprising one of the nation’s cleanest, lowest-cost power generation fleets. Constellation provides energy products and services to more than 2 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. And Exelon’s three utilities deliver electricity and natural gas to more than 7.8 million customers in central Maryland (BGE), northern Illinois (ComEd) and southeastern Pennsylvania (PECO).” Every day, we hear news about an impending stock market decline and an increase in interest rates. It was under this pretense that I went searching for companies that provide protection in both a rising interest rate environment and low beta stocks which could spare my portfolio in the event of a downturn. Low Beta The beta of a stock represents the systematic (market) risk of a company. When the beta is positive, the stock prices tend to move in the same direction as the market, and the magnitude of the Beta tells by how much. A stock beta greater than 1 implies that when the market goes up by 1%, we expect the stock to go up by more than 1% – the opposite is true if the market goes down by 1%. Utility companies are considered “Defensive” stocks because they typically have steady cash flows, attractive dividend yields and lower-than-average betas. Exelon is considered a “Diversified Utilities” company and has a lower-than-average beta of .24, compared to an average beta of .48 for all the “Diversified Utility” companies in the Russell 3000. All else being equal, we would expect to outperform its peer group in the event of a market downturn. Negative Earnings Duration What makes this sector especially enticing is that most of the firms have underfunded pensions, which represents a liability on the balance sheet. While that sounds ominous, it is quite common for older companies with pensions given the large amount of baby-boomers retiring today. In order to calculate the magnitude of the underfunded pension, you need to project out the future pension payments and discount them back at a specified rate of return, typically tied to the current interest rates. The difference in the pension liabilities is added or subtracted from earnings, depending on whether the liability is becoming smaller or larger. I like to call this “negative earnings duration” because the liability becomes smaller when you increase the discount rate (denominator). Duration measures the fall in price of a security given a 1% (parallel) rise in interest rates. In fixed income terms, we can say EXC has a negative earnings duration because earnings rise in a rising rate due the reduction in pension liability. Increasing interest rates reduce pension liabilities and increase earnings, all else equal. A quick glance at the magnitude of underfunded pensions in this sector makes EXC standout as an EPS beneficiary in a rising rate environment, given the size of its pension liability. On the Q3 conference call, Exelon management mentioned that every .25% rise in interest rates will lead to a .02 EPS increase. (click to enlarge) EXC selling at a discount compared to historical valuations and peer group Currently, EXC is selling below its 3 and 5 year price/earnings multiples, which could imply future mean reversion. Diversified utility companies typically have predictable cash flows and earnings due to the nature of the business and their hedging strategies. The charts below highlight the current PE multiple compared to its 3- and 5-year median as well as EXC quarterly earnings compared to analyst estimates. As expected, the actual earnings tend to oscillate around the estimates. (click to enlarge) (click to enlarge) Compared to its peer group, Exelon is selling at a discount by a nice margin based on PE multiples which implied that it is cheaper to own per share of earnings compared to its peer group: (click to enlarge) Dividend Coverage and Valuation Investors look to the utilities sector for dividends and EXC has not disappointed. The company has paid dividends consistently over the last 10 years and sports a healthy dividend coverage ratio. Dividend Cover is calculated by EPS/Common Dividends. For companies such as Exelon that are known to consistently pay dividends, taking a look at the dividend coverage ratio can be an effective way to see if dividend payments are being harder to make over time. Currently, dividend coverage is 1.816, which is healthy from historical perspective and makes the current dividend yield of 4.49% all the more attractive: (click to enlarge) When valuing EXC, we can look at the historical price earnings and price sales ratios for Exelon and its peer group over the last 20 years. From there, we can use the 2015 estimates for earnings and sales to derive a price for each and average the two together: Historical PE Multiple for EXC and Peer Group Average Median Blend 2015 EXC EPS estimate Price 1995-Present 22.9 16.2 19.55 2.5 48.875 Historical PS Multiple for EXC and Peer Group Average Median Blend 2015 EXC sales per share Price 1995-Present 1.5 1.23 1.365 28.11 38.37015 Source: Ycharts Blended price based on PS and PE 43.6258 Based on historical analysis, an intrinsic value of $43.62 represents a 58% upside from the current price ~$27.5 per share. Given EXC’s dividend coverage, low beta, (-) earnings duration and discount valuation, I believe it is a buy at these levels.