Tag Archives: energy

IDACORP: Consistent Utility Outperformer Still Looks Solid

Summary IDACORP has outperformed utility benchmarks on one year, five year, and ten year timeframes. Idaho’s recovery from the recession has been incredibly resilient, helping the utility perform above peer averages. The dividend yield isn’t amazing, but shareholders should expect 5% annual increases over the next five years. IDACORP (NYSE: IDA ) provides electric utility services to over five hundred thousand customers in southern Idaho and eastern Oregon. Idaho has been a relatively strong state coming out of the recession, maintaining below average unemployment while adding healthy, higher-paying jobs and maintaining a pro-business environment. These factors have combined with prudent management style from IDACORP has resulted in a company with a rapidly rising dividend in a normally benign sector. This performance has elevated shares, bringing them onto the radar for many investors. Those who got in early on this tiny utility with just 3,600MW of capacity have been awarded with solid gains as the shares have continued to repeatedly trounce utility benchmarks year in and year out. Is the long-term outlook for IDACORP as favorable as its past? Non-ownership Operational Risk Idaho Power generates nearly half of its power from coal-fired generation. Beyond the general risks of coal (shift to renewables, coal ash, regulatory risk, high capital expenditures to bring plants into emissions compliance), Idaho Power also bears the risk of not having a controlling interest. The three coal plants in which it has an interest are operated by Portland General (PGE), PacifiCorp, and NV Energy. This non-controlling interest gives Idaho Power limited control in operations, but it also gives the company an easier out if does choose to exit coal operations by being able to sell its partial stakes. As for continuing coal operations, the Boardman plant, as outlined in my article on Portland General , is already slated to be closed by 2020. Based on Idaho Power’s 2013 review, they will continue to undertake operations at the other two plants for the foreseeable future. Operating Results Roughly half of IDACORP’s power generation is generated from hydroelectricity generated along the Snake River and its tributaries. When water conditions are poor (due to poor snowpack melt in the spring, low rainfall, or a combination of both), hydroelectric generation falls. In order to fill these gaps, the company must usually purchase power on the open market to fill the gaps. Likewise when the rivers are strong, IDACORP has excess power to sell on the open market for additional revenue. Idaho has been experiencing historically warm and dry conditions for the past several years, which has led to a decrease in yearly power generation from its hydroelectric plants. Purchased power will touch $250M in 2015, up $80M from 2010 levels. As an offset to this, dry and hot weather means higher energy demand from IDACORP customers. Peak energy usage for the utility generally comes in the summer as customers run their air conditioners and irrigation pumps, dry weather exasperating the power draw needed to run these key items. In spite of this gross margin weakness, primarily due to increased purchased power, operating margins have been expanding. This has been primarily due to management chokehold on operations and maintenance costs. Cash from operations has been growing while capital expenditures have been falling. Cash burn has been marginal, with long-term debt barely moving over recent years. The current dividend yield of 2.84% is highly sustainable in my view and future growth is easily supported by operational cash flow. Conclusion IDACORP is a small utility that does trade at a fair premium to peers. The dividend yield is quite small but has been growing, especially in the last few years. The company can easily support future dividend increases so I expect that the company will bump the dividend meaningfully over the next five years, likely in the 5% range. While I might not advocate buying at current prices near 52-week highs, it definitely deserves to be on investor watch lists looking for steady, reliable future returns.

Guide To Middle East ETF Investing

Investing in the Middle East stock market might look to be daunting at this moment when the price of crude oil, which accounts for the lion’s share of the region’s revenues, continues to plunge and is currently trading near its six-year low. Geopolitical tension and depleting foreign reserves are some of the other issues disturbing the investment climate in the region. However, there is a potential upside to this dismal economic environment. Tumbling oil price has in fact led to the development of the non-oil sector in the Middle East, such as agriculture, banking, finance and tourism. If we look at the Purchasing Managers’ (“PMI”) Indices of two prominent Middle East economies – Saudi Arabia and United Arab Emirates – non-oil business activity in the region actually looks robust. The PMI index measures the performance of the non-oil private sector and is derived from a survey of 400 companies, including manufacturing, services, construction and retail. PMI in Saudi Arabia increased to 58.7% in August from 57.7% in July, while PMI in United Arab Emirates rose to 57.1% from 55.8% in July. Notably, both are higher than the PMI of 53.1% in the U.S. in the same month. According to an insight from Standard Chartered Bank, the long-term growth outlook for oil-rich regions in the Middle East remains positive. This is largely due to the higher emphasis laid by the governments of the region on long-term development objectives achieved through diversification. The insight highlights demographics and the rapid expansion of trade corridors as the two key factors driving growth in the region, particularly in banking and financial services. The International Monetary Fund (IMF) expects population in the 25 years age bracket to rise to 720 million from 445 million in 2000 in the Middle East and North Africa (“MENA”) region during the next five years. Coming to the question of trading partnerships, Saudi Arabia is currently the largest market for U.S. exports in the Middle East while the U.S. is the largest trading partner of Saudi Arabia, according to Saudi Arabian General Investment Authority (“SAGIA”). According to Standard Chartered Bank, the Middle East enjoys a tripartite trading relationship with Africa and India, which is currently valued at $200 billion and is anticipated to increase manifold to $2.7 trillion by 2030. In the midst of these positive developments, it seems reasonable to capitalize on the growing non-oil sector in the Middle East through ETF investing, as it is difficult to access the market when most of the businesses in the region are state-owned. Although Saudi Arabia – the biggest stock market in the Arab world and the largest among the Gulf States – opened up its door to foreign direct investment a few months back, ETF investing always remains a safer route as it helps investors to mitigate one company’s average performance with stellar results from other companies. Below we highlight three ETFs, which offer higher exposure to the non-oil sector in the Middle East as well as to organizations holding the key to future growth. WisdomTree Middle East Dividend ETF (NASDAQ: GULF ) Launched in July 2008, this ETF follows the WisdomTree Middle East Dividend Index, which measures the performance of the companies that pay regular cash dividends. It holds a basket of 74 stocks with the largest exposure to the top three firms – Qatar National Bank, First Gulf Bank and Industries Qatar – which collectively make up for more than 23%. This resulted in financials dominating the fund’s portfolio at 62.6% while telecom and industrials round off the top three with 16.7% and 13% allocation, respectively. The oil sector accounts for a meager 2% of the fund. The fund has amassed nearly $26 million in its asset base while trading in a small volume of roughly 10,000 shares a day. It charges 88 bps in fees from investors per year. The product has, however, lost 10.9% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares MSCI UAE Capped (NASDAQ: UAE ) Launched in April last year, this ETF follows the MSCI All UAE Capped Index, which measures the performance of large, mid or small-capitalization companies in UAE. Having a portfolio of 31 stocks, the fund’s top three holdings include Emaar Properties (16%), Abu Dhabi Commercial Bank (9.5%) and DP World (8.4%). Again, this ETF is heavily biased toward financials with 70% allocation, while industrials and healthcare have allocations of 17.3% and 5.3%, respectively. Energy has a very low exposure in the fund with only 3.6% share. The ETF has garnered around $30 million in assets and trades in an average volume of roughly 15,000 shares. It charges 62 bps in fees and was down 7.6% in the year-to-date time frame. The fund carries a Zacks Rank #3 with a High risk outlook. iShares MSCI Saudi Arabia Capped (NYSEARCA: KSA ) Launched only last month, this ETF tracks the MSCI Saudi Arabia Investable Market Index 25/50 Index, which measures the performance of the large, mid and small cap segments of the Saudi Arabia market. With a portfolio of 58 stocks, KSA’s top three holdings are Saudi Basic Industries (18.8%), Saudi Telecom (9.1%) and National Commercial Bank (7.8%). Notably, Saudi Basic Industries is one of the largest chemical companies in the world and Saudi Telecom is the largest telecommunications company in the Middle East and Africa (“MEA”) region. This ETF is not as heavily exposed to financials as the other two funds with 33.3% share. Materials and telecom sectors occupy the next two spots with 30.1% and 11.1% shares, respectively. It has minimum exposure to the energy sector (1.3%). Being a new entrant, the fund has gathered only around $4 million in assets and trades in a paltry volume of 2,000 shares. It charges 74 bps in fees per year and was up 3.8% in the last five days. Original Post

Dividend ETFs Battle It Out: Get The Right Sectors

Summary There are three big dividend ETFs from the major low cost index providers, Charles Schwab and Vanguard. Two of the three still offer yields over 3% and all three have excellent expense ratios. Investors deciding which one to buy should look at the sector allocation. These ETFs have some major differences in their allocations. Investors seeking high consumer staples exposure should look to SCHD and VIG. Investors wanting more financial exposure should look at VYM. SCHD and VYM both offer around 10% exposure to the energy sector, but VIG has very little allocation there. If you want oil in the portfolio, SCHD and VYM make. Can you smell what the dividend ETF champions are cooking? There are a few big dividend ETFs for broad exposure to companies offering respectable dividend yields. In this article I want to compare a few of them. Let’s meet the big contenders: Name Ticker Yield Expense Ratio Schwab U.S. Dividend Equity ETF SCHD 3.02% 0.07% Vanguard Dividend Appreciation ETF VIG 2.26% 0.10% Vanguard High Dividend Yield ETF VYM 3.10% 0.10% For investors that prefer to see those numbers in graphs, I put together a couple quick charts: First Impressions Investors right away may notice that the Vanguard Dividend Appreciation ETF doesn’t have a very high yield compared with the other dividend ETFs. It may be rational for investors looking at it to ask whether it should really be considered a high dividend ETF. While the Schwab U.S. Dividend Equity ETF technically only has 70% of the expense ratio of Vanguard’s options, the difference of .03% is not material. There is no viable way to spin the difference into being material. Assuming your decision isn’t based strictly on yields, the next area to look into is the sector allocations. I grabbed the sector allocations for each ETF: (click to enlarge) (click to enlarge) (click to enlarge) Sector Analysis The first thing that I’m noticing when I look at the sectors is that two of these funds go heavily overweight on consumer staples. When it comes to dividend ETFs, I like going overweight on consumer staples. Consumer Staples The nice thing about the consumer staples sector is that they are defined by the production of products that consumers will need regardless of what else is happening in the economy. Any sector can run into problems, but the kind of macroeconomic issues that can really slam my portfolio value should have a smaller hit on the earnings (and thus dividend potential) of companies in the consumer staples category. Of course, there is no free lunch. In exchange for getting companies that should be more resilient, I have to accept that during a prolonged bull market these companies are likely to rally less than other sectors. If my focus was strictly designing the portfolio for the highest projected total long term return, it would be very reasonable to argue against going heavy on consumer staples. It is up to each investor to determine how they feel about that trade off. If the investor wants more certainty that the underlying companies can sustain their dividends because they intend to use the dividends to cover living expenses, then the importance of those dividends being sustained is more important. Having to sell off part of the portfolio during the kind of recession that sees dividend cuts across the combined portfolio would be pretty painful. Financials Where SCHD and VIG put consumer staples at the top, VYM puts financials at number one. This is very interesting because SCHD placed it at 1.99% and VIG weighted it at 6.37%. Clearly the structure of the portfolio is materially different. There are some very good reasons to like the financial sector for investments. At the top of my list would be the demographic analysis showing that Generation Y is fairly weak at understanding money . If the next generation is less capable of understanding their money, then there may be more opportunities for the financial firms to make money off complicated products that the consumers don’t fully understand. That may sound cynical, but who cares? My goal is to understand where sales and profits will be flowing. If you own shares in the banks, would you encourage the CEO to ensure they have transparent pricing even if cuts earnings and means a smaller dividend? I really doubt shareholders would be thrilled to hear “We cut the dividend to make up for a cash shortfall from lowering prices when the current pricing system was working well.” My concern about aggressive allocations to the financial sector comes from regulation. If we see more regulatory pressure or cases brought against large banks for unethical actions in the pursuit of profit, the development could represent declining margins (from regulatory pressure) or cash expenses to settle cases. Energy SCHD and VYM both put energy over 10% of the portfolio. VIG holds it as just over 1% of the portfolio. There are some fairly different kinds of companies that can be considered “Energy” companies. When energy refers to enormous companies with strong dividends like Exxon Mobil (NYSE: XOM ), I like that allocation. If it was referring to much more volatile industries like off shore oil drilling, I wouldn’t be a fan. In the case of SCHD, XOM is the heaviest single holding. The same can be said for VYM. While the energy sector has been punished with oil prices at very low levels and no clear path higher, I see those issues as being priced into the shares. As long as the issues are already priced in, I want some exposure that would benefit from higher gas prices. Lower fuel prices mean more money for consumers to spend on other goods and services. If the low fuel price trend ends, I’d like to at least have the upside from earnings going up for a big dividend payer in the portfolio. What do You Think? Which dividend ETF makes the most sense for you? Do you want to overweight consumer staples for more safety in a downturn or would you rather have more upside in a prolonged bull market? Do you want to own the oil companies, or do you foresee gas as being in a long term downtrend that makes the business model much weaker?