Tag Archives: investing
Westar Energy: A Progressive Utility With A 3.5% Yield
Summary Westar Energy harnesses wind in Kansas for cheap power. Westar Energy retiring three old coal and gas plants. Westar implemented a $78 million rate increase in October. Westar Energy (NYSE: WR ) is a progressive utility company that is aggressively moving to clean power. Westar Energy plans to nearly double its clean power while reducing fossil fuel energy by 7%. In my previous article about Westar Energy, I told investors to buy this stock around $37 per share as the company adds cheap wind power while reducing coal. Kansas has some of the strongest winds in the country. Westar is prepared for tougher environmental regulations from the Clean Power Plan. The Clean Power Plan establishes state-by-state targets for carbon emissions reductions, and it offers a flexible framework under which states may meet those targets. The final version of the rule would reduce national electricity sector emissions by an estimated 32% below 2005 levels by 2030. Westar Energy has sufficient capacity right now to meet demand. But on a conference call with investors, Mark Ruelle, president and chief executive officer, said the investment in wind is primarily because it’s so inexpensive with the tax credits. The move also is a bit of a hedge on what form the Clean Power Plan takes in Kansas. Ruelle said wind energy is a bargain right now. (click to enlarge) Ruelle said Westar Energy has sent out requests for proposals to add another 500 megawatts of power. Right now 9% of Westar’s generation is from renewable resources, but that number will grow to 17% of generation in 2016. Nearly all of this energy will be from wind. Westar Energy’s energy generation mix includes 700 megawatts from wind energy, with commitments to add another 600 megawatts under development for a total of 1,300 megawatts. In addition, Westar is now considering adding another 500 megawatts on top of the 1,300. “We’re continuing to evaluate, but right now it looks like it makes more sense for our customers if we own all of our sizable portion of the incremental renewables,” Ruelle said. “Today our renewables portfolio is heavily imbalanced for PPA (Purchase Power Agreement) vs. ownership and if we don’t re-balance it a bit that might set us and our customers up for problems down the road when the PPAs expire, plus customer economics favor ownership,” Ruelle said. Westar Energy recently announced plans to close three small units at Lawrence, Tecumseh and Hutchinson by the end of the year. These are the first major unit that Westar has closed in the past few decades. The Lawrence and Tecumseh units burn coal, and the Hutchinson one uses natural gas. “It’s been good for our customers to hold on to these small old units as long as we reasonably could, but for a number of reasons, now is the right time to let them go,” Ruelle said. “They have lasted decades longer than anyone ever imagined, some of them are older than me, but given the clean power plan, their age, size and our need to manage expenses, it just doesn’t make sense to pour more money into them. They reflect two small 50s and early 60s vintage COLI units and a 60s vintage gas steamer. Together they are just 350 megawatts and less than 1% of plant investment.” Third quarter Westar Energy’s third quarter was sluggish. Cool-to-mild temperatures in August hurt demand for electricity. Westar Energy posted 3Q15 earnings of $138.2 million or $0.97 per share, compared with $146.9 million or $1.13 per share in 3Q14. Earnings for the nine-month period ended Sept. 30, 2015, were $253.4 million or $1.84 per share, compared with $270.3 million or $2.08 per share for the same period in 2014. The company has narrowed its 2015 earnings guidance range to $2.18-$2.25 per share from $2.18-$2.33. The company issued preliminary 2016 earnings guidance of $2.38-$2.53 per share. The company has strong financial strength. The company’s debt is investment grade. Total long-term debt was $2.941 billion at the end of 3Q15, compared to $3.224 billion at the end of 2014. The stock trades around 18.8 times earnings, which is a slight premium to its peers. Westar will see earnings improve in the fourth quarter and in 2016 due to implementation of a $78 million rate increase, approved by the Kansas Corporation Commission. Risks Utilities are sensitive to interest rates. When the Federal Reserve begins raising interest rates, these stocks are likely to take a hit. Utilities had a nice run up in 2014, but haven’t performed well in 2015. The Utilities Select Sector SPDR Fund (NYSEARCA: XLU ) is down -9.47% YTD. Westar stock has held up fairly well in 2015, down only -1.14% YTD. Ruelle said one large chemical producer had reduced consumption of electricity due in part to the low prices for oil. I believe we are near a bottom in oil but the price recovery will be slow and arduous. Weather is always a factor with utilities. Westar benefits from extremely hot temperatures in the summer and really cold temperatures in the winter. 2015 was mild to moderate most of the year in Kansas. Conclusion If Westar falls into the high $30s again, investors may want to consider buying the stock. Westar is a well-run utility with strong financials and steady income. The stock offers a yield of 3.5% with potential for modest appreciation. I bought WR at $37.03 on Aug. 27, 2015. The stock recently traded at $41.32 per share, a gain of 11.58% plus the gain from the $0.36 dividend for a total gain of 12.55%. I’m holding o nto the stock. Long-term investors will get the dividend and likely modest appreciation with a 12-month target price of $44.
SCHX: Low Fees Just Got Lower And The Portfolio Is Still Great
Summary SCHX is a leader among low fee ETFs. This balanced portfolio works great as a core holding. The fund holds most of the major companies in the domestic market, so diversification should focus on bonds, international exposure, and REITs. One of my favorite funds that is not currently in my portfolio is the U.S. Large-Cap ETF (NYSEARCA: SCHX ). This fund offers investors exposure to the domestic equity market and has a rock bottom exposure of .04%. Or at least, I used to think .04% was the lowest investors would find on domestic equity. It turns out Schwab is in a pricing battle with BlackRock’s (NYSE: BLK ) iShares products and will be lowering the expense ratio from .04% to .03%. What does SCHX do? SCHX attempts to track the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index. At least 90% of funds are invested in companies that are part of the index. SCHX falls under the category of “Large Blend.” Largest Holdings The portfolio has solid diversification. The SPDR S&P 500 Trust ETF ( SPY) is holding a very similar portfolio but with a slightly larger allocation to the top companies, such as 3.55% in Apple (NASDAQ: AAPL ). However, the additional diversification for SCHX can be partially set off by some of the companies near the top being less volatile or by the ETF having less trading volume. (click to enlarge) Perhaps the question should be why investors would choose options with higher expense ratios when the holdings in SCHX make so much sense. The huge holdings here are established dividend growth champions, which the exception of AAPL and Facebook (NASDAQ: FB ), however I suspect that within 10 years those companies will have a very solid history of raising their dividends. Sector The one thing that concerns me about the way the fund is set up is the relatively light weights given to utilities and to consumer staples. I feel that makes this portfolio a little more aggressive than I prefer to be with the core of my portfolio. (click to enlarge) The reason these sectors are so appealing to me has everything to do with where we are in the macroeconomic sector. We’ve been in a prolonged bull market for quite a while and the valuations have started to get fairly rich. The Federal Reserve has given clear signs that they are desperate to raise rates, but I don’t foresee them being able to raise rates more than once or twice because the international rates are so low. If the Federal Reserve does manage to raise rates, I would be concerned about it creating headwinds for the domestic equity market and the possibility of establishing a new recession. To guard against that risk without having to sell out of the market, I prefer to increase the allocation to the more defensive sectors. Utilities benefit from functioning as regulated monopolies which allows them to expect to earn a fairly steady rate of return. Their prices do move up and down with bonds which would make higher bond yields suggest that utility prices might go down, but the utilities also offer dividend yields that are often superior to the bond yields and they benefit from increasing dividends in most years. That creates a very compelling risk/reward proposition and gives investors a solid reason to favor adding a utility allocation to their portfolio when using SCHX as the core. Consumer staples benefits from having established positions and selling products that consumers buy in good times and bad times. For instance, the tobacco industry has been a great source of returns for the consumer staples sector and continues to create sales regardless of what is happening in the market. My estimates on reasonable allocations for consumer staples and utilities for a highly risk-averse investor would be running as high as 40% of the domestic equity position. Since these sectors only give us 9.1% and 3.0%, that would require investors to specifically add exposure to the portfolio. Meanwhile they could use a fund like SCHX for another 40% of the domestic equity allocation. I would want the remaining 20% of the domestic position for REITs. Investors looking for an easy way to invest in the consumer staples sector may want to consider the Vanguard Consumer Staples ETF (NYSEARCA: VDC ) as a solid partner for working with SCHX in a portfolio. For utilities, I would suggest the Vanguard Utilities ETF (NYSEARCA: VPU ). Conclusion SCHX is a very strong contender to be a core holding in the new portfolio. I wanted a replacement for SPY that I would be able to trade without commissions. Of course, I also wanted to see a lower expense ratio, and SCHX delivered that. I like the idea of combining a large cap fund like this with domestic positions in consumer staples and utilities to create a more defensive weighting since the market has been in a prolonged bull period and the price/earnings ratios have become fairly rich. Prices have dipped back down since late summer, but now investors are facing the possibility of weaker earnings in 2016 which could offset the reduction in price.