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Best S&P 500 Utility Stocks According To Zweig Principles: Consider Ameren Corporation

Summary Ranking the top 20 S&P 500 utility stocks according to “All-Stars: Zweig” ranking system. Explanation and back-testing of the “All-Stars: Zweig” ranking system. Description and a buy recommendation for the first-ranked stock of the system: Ameren Corporation. S&P 500 utility stocks have underperformed on average the S&P 500 index over the last year. The average return of the 29 S&P 500 utility stocks that are included in the S&P 500 index (included dividends) in the last 52 weeks has been only 0.18% while the S&P 500 index has returned 2.96%. The table below shows all S&P 500 utility companies, ranked according to their 52-week return. (click to enlarge) On one previous article from September 15, 2014, I described the “All-Stars: Zweig” ranking system. However, in this article, I updated the backtesting of the system and ran it on another group of stocks. The “All-Stars: Zweig” ranking system is quite complex, and it is taking into account many factors like EPS Growth, Sales Growth, Market Performance and Insiders activity, as shown in the Portfolio123’s chart below. To find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available through the Portfolio123 ‘s screener. For the back-test, I took all the 6,555 stocks in the Portfolio123’s database. The back-test results are shown in the chart below. For the back-test, I divided the 6,555 companies into 20 groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the “All-Stars: Zweig” rank. The highest-ranked group with the ranking score of 95-100, which is shown in the light blue column in the chart, has given the best return – an average annual return of about 17%, while the average annual return of the S&P 500 index during the same period was about 3.2% (the red column at the left part of the chart). Also, the second, the third group, and the fourth group (scored: 90-95, 85-90, and 80-85) have yielded superior returns. This brings me to the conclusion that the ranking system is very useful. After running the “All-Stars: Zweig” ranking system on all S&P 500 utility stocks on November 24, I discovered the 20 best stocks, which are shown in the table below. In this article, I will focus on the first stock of the list: Ameren Corporation (NYSE: AEE ). (click to enlarge) Company Description St. Louis-based Ameren Corporation powers 2.4 million electric customers and more than 900,000 natural gas customers in a 64,000-square-mile area through its Ameren Missouri and Ameren Illinois rate-regulated utility subsidiaries. Ameren Illinois provides electric delivery and transmission service as well as natural gas delivery service while Ameren Missouri provides vertically integrated electric service, with generating capacity of over 10,200 megawatts, and natural gas delivery service. Ameren Transmission Company of Illinois develops regional electric transmission projects. In 2014, the company generated 61% of its electricity from coal, 16% from its Callaway nuclear plant, 2% from hydro sources, 1% from gas, and 20% from outside purchases. (click to enlarge) Source: Edison Electric Institute Financial Conference On November 06, Ameren Corporation reported strong third quarter 2015 financial results, which beat EPS expectations by a big margin of $0.11 (8.5%) and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters, as shown in the table below. Data: Yahoo Finance Ameren announced net income attributable to common stockholders of $343 million, or $1.41 per diluted share, for the third quarter of 2015, compared with $293 million, or $1.20 per diluted share, for the third quarter of 2014. The year-over-year increase in third quarter 2015 earnings reflected higher retail electric sales volumes driven by warmer summer temperatures that were near normal. The comparison also was favorably affected by earnings on increased investments in electric transmission and delivery infrastructure made under formula ratemaking. In addition, earnings benefited from a seasonal rate redesign and the timing of revenues under formula ratemaking for Ameren Illinois’ electric delivery service as well as a lower effective income tax rate. In the report, Warner L. Baxter, chairman, president and chief executive officer of Ameren, said: We are on track to deliver strong earnings growth in 2015. This growth is driven by the execution of our strategy, which includes allocating capital to jurisdictions with modern, constructive regulatory frameworks and managing our costs in a disciplined manner for the benefit of all our stakeholders. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The formulaic Illinois rate structure is constructive, and with increased capital expenditures in the Illinois utility, rates will increase further. The company is waiting for rulings from the Illinois Commerce Commission about an electric delivery formula rate increase along with a natural gas delivery rate case that would raise rates. A decision in these cases is expected in December. The company is experiencing a more favorable regulatory climate at the state level than in the recent past, and, under a Federal Energy Regulatory Commission formula rate plan, is benefiting from returns on its transmission buildout program, which are usually higher than the returns earned on electricity generating and distribution assets. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation. Valuation Year to date, AEE’s stock is down 6.0% while the S&P 500 Index has increased 1.3%, and the NASDAQ Composite Index has gained 7.7%. Moreover, since the beginning of 2012, AEE has gained only 30.8%. In this period, the S&P 500 Index has increased 65.9%, and the Nasdaq Composite Index has risen 95.9%. AEE Daily Chart (click to enlarge) AEE Weekly Chart (click to enlarge) Charts: TradeStation Group, Inc. Ameren’s valuation is fairly good. The trailing P/E is at 16.25, and the forward P/E is at 15.93. The price to book value is at 1.53, and the Enterprise Value/EBITDA ratio is low at 8.32. On October 09, the company declared a quarterly cash dividend on its common stock of 42.5 cents per share, a 3.7% increase from the prior quarterly cash dividend of 41 cents per share, resulting in an annualized equivalent dividend rate of $1.70 per share. The previous annualized equivalent dividend rate was $1.64 per share. The forward annual dividend yield is pretty high at 3.92%, and the payout ratio at 61.2%. The annual rate of dividend growth over the past three years was at 1.2%, and over the past five years was at 0.9%. Ameren expects the dividend payout ratio to be between 55% and 70% of annual earnings. AEE Dividend data by YCharts Summary Ameren delivered strong third quarter 2015 financial results, which beat EPS expectations by a big margin and raised the low end of its core EPS guidance range to $2.55 to $2.65 from $2.45 to $2.65 previously. The company showed significant earnings per share surprise in three of its last four quarters. In my view, Ameren is well positioned to achieve its target for strong long-term earnings growth. According to the company, it expects 7% to 10% compound annual EPS growth from 2013 through 2018. Ameren’s $8.9 billion, five-year regulated capital spending plan should help to drive long-term EPS growth. The company recently raised its dividend by 3.7% to a new annual rate of $1.70 per share. The forward annual dividend yield is pretty high at 3.92%. All in all, Ameren is a reliable, fully regulated utility that should provide investors with growing dividend income and long-term share price appreciation, and its stock is an investment opportunity right now.

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.

Residential REITs Offer Steady Dividends With Long-Term Growth Potential

Summary REZ is a well-diversified ETF with both moderate long term growth potential and a 3.3% dividend yield, making it a great income play. REZ has ~49% of its holdings in residential REITs, which are expected to experience steady demand over the next few years as renting becomes more and more attractive. REZ also has ~29% of its holdings in healthcare REITs, which are primarily composed of different types of senior housing. As baby boomers retire, demand here is expected to skyrocket. Finally, REZ has ~22% of its holdings in self-storage REITs, a booming industry of late. They tend to follow economic trends, so I’m bullish on self-storage REITs as well. The potential risk posed to REITs from an interest rate hike is not to be ignored, as it increases the cost of financing new projects. The iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) is a popular ETF for those who wish to invest in US residential real estate without actually being a landlord. It does this by using the FTSE NAREIT All-Residential Capped Index as its benchmark index, which is comprised of many different REITs. Taking into account demographic changes, a trend towards renting instead of buying and a recovering economy, I’m bullish REZ in the long term. I view it as a great income play with moderate long-term growth potential as well. REZ Overview Offering an attractive dividend yield of 3.3% and a tolerable expense ratio of 0.48%, this ETF has been popular with investors since its inception in May 2007. It currently has about $316MM in assets. REZ can generally be looked at as holding 3 different types of REITs. The first are obviously residential REITs, which develop multifamily housing such as apartment complexes. The second are healthcare REITs, which can generally be categorized as senior housing. The third are self-storage REITs. (click to enlarge) (Source: Data for chart by iShares.com ) To find the holdings for the chart above, I went through each individual holding and categorized it as self-storage, healthcare or residential. Some that I categorized as residential may have been categorized by iShares as specialty. Due to this, my percentages are about 2% off of iShares own classification, which is between residential, healthcare or “specialty” (which I felt was too broad). As you can see, while traditional residential REITs make up 49% of this ETF, there are still significant investments in self-storage and healthcare REITs. Due to this, one has to consider many more factors than just the residential housing market when considering investing in REZ. I’ll be reviewing the outlook for all 3 of the different types of REITs in this article. Residential REITs Outlook Housing prices are just below record highs, but this time it’s not thought to be a bubble , as strong economic growth has fueled increasingly higher housing prices. This is very bullish for residential REITs, as more and more people are resorting to renting. Mortgage requirements are tighter, making it more difficult for lenders to make loans than it was pre-2008. This coupled with slow wage growth makes buying a home less feasible for many people. Additionally, new US housing starts are very low, with these high prices simply mirroring the scarcity of supply. As you can see below, builders still haven’t recovered from the recession. (Source: tradingeconomics.com ) When adjusted for inflation, housing prices are just below record highs, according to the census . The rate at which housing prices have increased has also remained at a respectable level into these highs as well. (click to enlarge) (Source: Data by S&P Dow Jones Indices) Keith Gumbinger, VP of HSH.com, dismissed the idea that a bubble is forming, stating that “Today’s rising prices are fueled by actual market forces, backed up by real money.” This couldn’t be more true in my opinion, and many economists do not believe a bubble is forming either. All of these factors, which make buying a home less and less realistic are very bullish for residential REITs, as people will naturally resort to renting. As you can see in the chart below, the trend has clearly been in favor of renting the last 5 years. The US rental vacancy rate is currently reaching lows not seen since 1985. (Source: US Rental Vacancy Rate data by YCharts) It’s thought that housing prices will continue to increase, albeit at a slower rate than they have in the past few years. I don’t see the vacancy rate significantly rising again either. So with housing prices expected to continually grow, the only risk I can see to this REIT category is the potentially negative effect an interest rate hike could have. This investment is not without its risks though, as higher interest rates increase the cost of financing the balance sheet. This makes projects more expensive for REITs, which depend heavily on debt to finance new projects. Some would disagree that an interest rate hike is net bearish for REITs, saying that increased economic growth and occupancy rates are closely linked to the performance of REITs. They say that once everything is factored in, REITs will come out at a net gain due to increased occupancy rates and inflation. So while the net affect of an interest rate hike isn’t clear, I’d recommend those interested in REZ conduct their own due diligence to decide for themselves. Healthcare REITs Outlook Healthcare REITs make up 29% of REZ’s holdings and are very well positioned to take advantage of the massive impending demographic changes in the United States. The “Baby Boomer” generation is aging, with about 10,000 turning 65 every day . As this segment of the population begins to age, healthcare REITs owning senior housing facilities will see a huge and steady surge in demand. (Source: FiveThirtyEight.com ) Investments in healthcare REITs are a long-term strategy though, so I wouldn’t recommend this ETF to medium-term investors, as nearly a third of REZ’s holdings are in healthcare REITs. As a 2005 study by Stefano DellaVigna and Joshua Pollet found one needs to wait 5-10 years before fully reaping the benefits that demographic changes bring to businesses. I think this finding applies best to healthcare REITs in the current environment. With many of them having been beaten down over the last couple years, there is serious growth potential to go along with the handsome dividends these REITs offer to those who are patient. So for those willing to wait, I view this segment of REZ bullishly in the long term. Self Storage REITs Outlook Self storage REITs, which make up about 22% of REZ’s holdings, have exploded over the last few years in both share price and popularity. With average occupancy rates around 90% and a business that tends to reflect economic trends, there are plenty of reasons to be bullish here. These REITs are extremely profitable as well. REZ’s largest self-storage holding (12% of assets), PSA, had a net profit margin of 52% last year. Most self-storage REITs have performed very well over the past few years as well, showing the sector has growth potential in addition to respectable dividends. I expect demand to grow with the economy as well, so I have a favorable long-term outlook for these REITs. (click to enlarge) (Source: San Clemente Self Storage ) I expect demand for these self-storage units to go hand in hand with demand for rental housing as well. An article by the CCIM institute noted that about 30% of the average property’s customer base lives in apartments and about 13% live in townhomes/condos. These higher housing prices are driving more people to renting or downsizing, increasing demand as they’ll need more room to store all of their “stuff.” It’s worth noting though that self-storage REITs see increased competition compared to many other types of REITs, as the vast majority of self-storage facilities are owned by local entrepreneurs. Back in 2000, REITs made up less than 10% of new development. While that was a long time ago, I expect that local entrepreneurs still maintain ownership of a sizable portion of self storage facilities. Some of the more profitable facilities are being acquired by REITs, but the large amount of locally owned facilities puts increased competitive pressure on REIT-owned facilities. In general though, I view self-storage REITs very bullishly in the medium term to long term. REZ: A Great Income Play With Long-Term Growth Potential After a thorough review, one can see that this ETF is well-diversified into many more sectors than purely residential REITs, as the name suggests. In my opinion, REZ would be a great addition to the portfolio of a long-term income investor who is interested in taking on a little bit more risk in exchange for moderate growth potential. The 3.3% dividend offers a great opportunity for steady income just as owning physical real estate would, but with much greater liquidity. In addition to the dividend, it offers a moderate growth opportunity to more aggressive income investors who believe housing prices are going to rise and want to take advantage of the drastic demographic changes taking place. I believe each of the 3 primary types of REITs that REZ holds will grow with the economy over the next decade. This investment is not without its risks though, so when considering an investment in REZ, one should weigh the immediate negative affect an interest rate hike could have with the dividends and long-term growth potential. I wouldn’t recommend investors use REZ as their primary income source, as the trend towards renting may change over time, which could have an adverse affect on share prices and dividend payments. Overall though, I think the factors mentioned above would make REZ a great portfolio addition for long-term growth investors who want their portfolio to generate additional income, as well as purely income investors who want to pursue moderate growth while not giving up their income stream. Conclusion REZ is a well-diversified ETF that is much more than simply a residential REIT. There are many factors one needs to account for and many different markets that one should research. From a fundamental perspective, though, I view each of the 3 primary REIT types that REZ holds bullishly in the long term. I think that long-term investors who believe that growth and income investing don’t have to be mutually exclusive could benefit greatly from this ETF. I think that long-term investors who are patient will see their diligence handsomely rewarded through steady dividend payments and moderate growth.