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The 4 Horsemen Of Southern Utilities, Revisited

Combined, these four utilities service over 22.8 million customers in 11 states. These states represent some of the best for regulatory friendliness to utilities, an important fundamental for all utility investors. The Southeast’s economic growth has lagged the national average, but the recent growth curve appears to be favoring this region. In March 2013, I penned an article that suggested owning four utilities servicing the southern states. These were Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), Duke Energy (NYSE: DUK ), and SCANA Corp. (NYSE: SCG ). There is still good reason to implement this strategy. The first is the geographical territory covered by these. Combined, the geography stretches from Virginia to Mississippi and from Florida to Indiana and Ohio. A basic concept for utility investing is: It’s all about location, location, location. After SO gobbles up AGL Resources (NYSE: GAS ), these four will service a combined 22.8 million customers. Below is a list of states covered by each firm: Southern Co.: Mississippi, Alabama, Florida, Georgia, and soon to add Arkansas with the AGL merger Dominion Resources : Virginia, West Virginia, and Ohio Duke Energy : Florida, South Carolina, North Carolina, and Indiana SCANA Corp. : South Carolina, North Carolina, and Georgia These states represent areas of improving economic growth. Over the past four years, the Bureau of Economic Analysis has pegged the average annual growth in the Southeast at 1.3%, after getting a slow start in 2011 at a sub-par growth of 0.6%, or less than half the 2011 national average. In 2014, the percent change in GDP for the Southeast was 1.7%, still slightly worse than the national average of 2.2%. However, the percentage growth trend line is one of the best in the country. From a regional growth perspective, the Southeast has improved from last in 2011 to fourth out of eight in 2014. Continuing regional and national outperformance in key service states of Georgia, Florida, South Carolina, West Virginia, and Ohio will offer better organic opportunities for these utilities. Personal income annual growth has been approximately the same as the national level at a four-year average of 3.75%. Population growth has been strong at 12% above the national average at 0.9% a year. Below is a graph of GDP growth by state offered by the BEA. (click to enlarge) These four utilities cover states that are usually considered healthier for regulatory oversight. The credit side of S&P offers an assessment of the regulatory environment as their friendliness, or lack thereof, has an impact on the credit worthiness of regulated utilities. Pre-2014, S&P offered a four-category grouping (More Credit Supportive, Credit Supportive, Less Credit Supportive, Least Credit Supportive), but since changed to a three-category grouping (Strong, Strong/Adequate, Adequate), which is a bit less precise. However, it is still a meaningful comparison of the 10 states listed above. Southern Co.: Mississippi (Adequate, Credit Supportive), Alabama (Strong, More Supportive), Florida (Strong, More Supportive), Georgia (Strong/Adequate, More Supportive), and Arkansas (Strong/Adequate, Credit Supportive) Dominion Resources: Virginia (Strong/Adequate, Credit Supportive), West Virginia (Strong/Adequate, Less Supportive), and Ohio (Strong/Adequate, Credit Supportive) Duke Energy: Florida (Strong, More Supportive), South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Indiana (Strong/Adequate, More Supportive) SCANA Corp.: South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Georgia (Strong/Adequate, More Supportive). On average, Duke and SCANA have better regulatory profiles than Southern and Dominion. Below are S&P Credit post- and pre-2014 utility regulatory assessments by state: (click to enlarge) Source: S&P Credit (click to enlarge) Source: S&P Credit Below is a table comparing various stock fundamentals for each of the four horsemen: Source: Guiding Mast Investments, reuters.com, morningstar.com Since 2013, Dominion’s equity rating fell one notch while SCANA’s increased one notch. Southern Company’s credit rating fell by one notch and Duke’s increased by the same amount. From the table above, the PEG ratio indicates the better value seems to be Dominion and SCANA while Southern and Duke have the highest yields. Dominion and SCANA’s trailing 12-month return on invested capital, ROIC, is higher than their respective five-year averages, indicating improving capital management. Below are fastgraph.com presentation of each of these stock’s 20-year history and current valuations: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Below are total return performance charts of the four utilities, as offered by Morningstar.com, starting with a graph of total return of a $10,000 investment five years ago: Source: morningstar.com However, each utility has some issues. Southern Co. and SCANA share similar concerns with large nuclear power construction projects in progress. Dominion is spinning off natural gas assets into its drop-down MLP. Duke may have paid a high price for its latest acquisition as it continues to move towards a higher exposure to regulated returns. Both Duke and Southern Company are expanding their regulated businesses by buying more natural gas customers in existing service territories. Within the realm of underlying consolidation trend in the utility sector, three of the four should remain the acquiring companies while SCANA could be an acquired company, especially after its large construction exposure diminishes over the next few years. For example, with an enterprise value of $15 billion, SCANA could be absorbed by any of the other three. Overall, utility investors looking to expand their horizons should consider any or all of these four horsemen of the southern utilities. Author’s note: Please review disclosure in author’s profile.

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.

Homebuilding ETFs In Focus Following U.S. Home Resale Data

The recent home resale data from National Association of Realtors (“NAR”) indicated that the U.S. homebuilding sector still faces weaknesses. The data showed a 3.4% decline in existing home sales in the U.S. to an annual rate of 5.36 million units in October from 5.55 million units in September. The decline is blamed on the shortage of properties that pushed up prices and discouraged buyers of existing homes. Per NAR, the number of unsold homes for October ebbed 2.3% over the previous month to 2.14 million units. Unsold homes inventory was down 4.5% from the prior year. The tight inventory caused median home price to increase 5.8% from the year-ago level to $219,600, marking the 44th straight month of a year-over-year rise (read: Homebuilder Stocks and ETFs Gain on Solid Data ). Last week, U.S. Commerce Department also revealed disappointing housing starts data for October. Groundbreaking dipped 11% to a seasonally adjusted annual pace of 1.06 million units during the month, the lowest level in the past 7 months. The decline was attributed to slowdown in the construction of multi-family homes. Groundbreaking data for the largest housing market segment indicated a 2.4% fall in single-family home projects for October. Much of the decline has been contributed by a 6.9% downfall in groundbreaking activity in the South, the most active region for the homebuilding sector. Meanwhile, housing starts for the multi-family segment slumped 25.1% to the annual pace of 338,000 units. Notably, new single-family home sales in the U.S. tumbled 11.5% to a seasonally adjusted annual rate of 468,000 units in September from August. This has led to 5.8 months’ supply of new homes in September, the highest since July last year. The U.S. homebuilding sector already faces a major threat from the strong possibility of an interest rate hike by Fed in December. A higher interest rate environment heavily weighs on the affordability of homes. On the other hand, it raises the mortgage rates that could fend off existing homeowners from upgrading to luxury and expensive homes (read: Is it the Right Time for Homebuilder ETFs? ). However, some have predicted that the decline in housing activities during October could be short-lived, particularly when the labor market is improving and the broader market is recovering. Further, industry experts argue that Fed’s lift-off could send a positive signal about the economy and boost consumer confidence. ETFs in Focus The depressing homebuilding reports for October turns our attention to the ETFs tracking the performance of the sector. Although the two major homebuilding ETFs (discussed below) delivered good performance both in the one-month and year-to-date time frames, investors should remain cautious about them given the adverse developments and the threat of an impending rate hike by the Fed (read: Two Homebuilder ETFs & Stocks Set to Soar ). iShares U.S. Home Construction ETF (NYSEARCA: ITB ) This most popular homebuilding fund provides a pure play on the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a basket of 41 stocks, with double-digit allocation going to both D.R. Horton (NYSE: DHI ) and Lennar Corp. (NYSE: LEN ). The product has amassed more than $2 billion in its asset base and trades in heavy volume of more than 3.7 million shares per day, on average. The ETF charges 43 bps in annual fees, and has added about 2.9% in the past one month and 10.4% in the year-to-date period (as of November 24, 2015). It has a Zacks ETF Rank #2 (Buy) with a High risk outlook. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) XHB follows the S&P Homebuilders Select Industry Index, representing the homebuilding sub-industry portion of the S&P Total Markets Index. The fund holds 36 securities in its basket, with none accounting for more than 3.87% of the assets. It has garnered about $1.9 billion in its asset base and exchanges a heavy volume of roughly 3.4 million shares per day, on average. XHB charges 35 bps in annual fees and returned 0.6% in the last one-month and 6.9% so far this year. It has a Zacks ETF Rank #2 with a High risk outlook. Original Post