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20% Dividend Raise And Recent Pullback Make My Favorite Utility Northwestern Corp. Attractive

NWE raised its dividend 20% for Q1 2015 to $0.48 per common share (3.67% annually). Q4 2014 adjusted earnings were $2.68 per share (at the midpoint of guidance of $2.60-$2.75) a +7.2% improvement over Q4 2013. Total revenues were about $312.95 million. This was a miss of -$37.14 million. Revenues were down year over year about -1.9%. Northwestern Corp. (NYSE: NWE ) does business under the name Northwestern Energy. On February 15, 2002 Northwestern Corp. acquired the energy distribution and transmission business of Montana Power to form Northwestern Energy (still Northwestern Corp. though). It is a leading energy delivery company with business in Montana, South Dakota, Nebraska, and Wyoming, especially the first two states. It recently raised its dividend by 20% to $0.48 per common share per quarter for a 3.67% annual yield. The long term chart of NWE below shows it to be in a strong upward trend long term. (click to enlarge) Essentially NWE has gone straight upward since the low of the Great Recession. Perhaps as significantly, it had recovered fully from the Great Recession by April 1, 2010. Such stalwarts as Chevron and Johnson & Johnson took much longer — until early 2011 and late 2012 respectively. Even stalwart utility companies such as Southern Company (NYSE: SO ) and Consolidated Edison (NYSE: ED ) took until early 2011 to recover to their 2007 highs. NWE has a past as an outperformer; and its future will likely be equally as bright. To understand the latest stock price movements, it may be best to look at the charts of the 10 year US Treasury Note yield and the one year chart of NWE . (click to enlarge) The yellow line in the NWE chart above demarks January 30, 2015, which was the recent yield nadir for the 10 year US Treasury Note. As the yield for the 10 year US Treasury Note rose from 1.64% on January 30, 2015 to 2.24% on March 6, 2015, the price of NWE stock fell. This is the normal scenario for utilities when interest rates rise because the utilities’ dividend rates are normally remaining unchanged. This high correlation also likely tells investors that this is a good time to buy NWE (and utilities in general), if you believe the yield on the 10 year US Treasury Note is resuming its downtrend. There are many reasons to believe this: Most EU bonds have been trending downward due to the €1.1 trillion ECB QE program in 2015. Many bonds that are generally viewed as riskier and less stable than US Treasuries currently have much lower yields (and are much more expensive) than US Treasuries. For example, the Spanish 10 year bond yield is 1.15% and the Italian 10 year bond yield is 1.13% . These low yields on “riskier” bonds should push the yields of the “less risky” 10 year US Treasury bonds downward. The 10 year US Treasury Note yield is 2.12% as of this writing March 13, 2015. The USD has risen dramatically against the Euro and other currencies in the last year. For instance, the Euro has fallen from 1.39 USD per Euro on May 6, 2014 to 1.06 USD per Euro as of the close on March 12, 2015 (almost a -24% drop). If the USD is appreciating against other currencies, that makes US Treasuries that much more attractive to foreign investors. After all a European could have made fantastic money just on the appreciation of the USD since May 6, 2014, if the European had owned US Treasuries. He/she would also have gotten the yield on the Treasuries. Plus since US Treasury yields have been going down, the European investor would have gotten appreciation on the price of the US Treasuries. Since many people think the devaluation of the Euro versus the USD is likely to continue as the ECB dispenses more QE in 2015, many Europeans seem likely to invest in US Treasuries. This should act to increase the prices (decrease the yields) of US Treasuries. That in turn is also motivation for investors (including Europeans and Japanese) to buy US utility stocks, which will likely have stable to increasing yields. All of the major economies other than the US have been increasing easing actions. The BOJ has a huge QE program . The PBOC has recently been announcing new easing programs . If there is a lot of extra liquidity around, people will not want to pay very much in interest rates to borrow money. Foreign investors will also be happy to keep their money in Treasuries of the one country with an appreciating currency (the one that is not doing more easing currently). The US Fed has talked about raising its rates, especially the Fed Funds rate. If it did this, that would likely lead to higher US Treasuries yields. However, this is increasingly unlikely. The US inflation rate was -0.1% in January 2015; and the overall trend has been strongly downward in recent months. If the US Fed tries to raise rates in that environment, it will only cause STAGFLATION. Further a raise in rates would cause the USD to appreciate that much faster; and the appreciation we have seen just since May 6, 2015 is already hurting US exports. It is also spurring foreign imports. Both of these items will tend to act to destroy US jobs, although there may be a lag in the effect. This would act directly against the Fed’s mandate on full employment. Plus it clearly doesn’t need to control inflation through a rate increase at this time, which is the Fed’s main mandate. On top of all of the above, NWE is a well run company that has seen steady growth. Adjusted EPS for Q4 2014 were $2.68 per common share (a +7.2% improvement over Q4 2013). For FY2014 GAAP Net Income was $120.7 million (or $2.99 per diluted share) compared to $94.0 million of $2.46 per diluted share for FY2013 — a 22% improvement. GAAP Net Income guidance for FY2015 is for $3.10-$3.30 per diluted share — a midpoint 7% improvement. This is good growth for a utility. A key factor in NWE’s growth will be the new Hydro facilities purchased from PPL Montana in late 2014. These are eleven hydroelectric generating facilities ( 633 Megawatts ). They were obtained for $900 million. $870 million of that purchase price was added to the rate base with a 50-year life. Return on equity is expected to be 9.8%. The capital structure is 52% debt and 48% equity. This resulted in $400 million in issued equity (7.767 million shares issued at $51.50 per share) and $450 in new debt. The resulting first year annual retail revenue requirement is approximately $117 million. The debt is 30-year first mortgage bonds with a coupon of 4.176%. The all-in cost of the debt was 4.353%. Of this 4.25% is recoverable under the hydro approval granted by the Montana PSC. The transaction closed November 18, 2014. This should be a good new revenue source for FY2015. It should help NWE meet or exceed its guidance. The chart below shows NWE’s recent history of meeting or exceeding its guidance. (click to enlarge) As investors can see, there is a high likelihood that NWE will beat its initial FY2015 guidance. Any upward revisions during the year should help the stock rise. With a 3.67% dividend and an uptrend in the stock price that is almost unshakeable, NWE appears to be about as much of a sure thing as investors can find. When you add the quick recovery it showed from the Great Recession, it makes it even more attractive in a very uncertain market. We have already had six plus years of the current bull market. A bear market may be on the near horizon. If so, NWE may be a relatively good place to be. It will pay you a nice dividend to wait for a recovery in any stock price fall. Another point in NWE’s favor is that Fitch upgraded NWE’s Issuer Default Rating to BBB+ on November 5, 2014. Fitch gave as reasons: The acquisition of the hydroelectric portfolio. The low risk, regulated utility business model. The improved financial and business profile. Its moderating CapEx budget. From a metrics standpoint, the PE of 17.49 and the FPE of 15.34 indicate a currently reasonable price of $52.30 per share as of the close March 12, 2015. The average analysts’ one year price target is only $57.46 per share, but this could easily rise significantly if the new hydro facilities provide a bit more income than has likely been conservatively estimated. The Beta of 0.52 is also a positive in an uncertain market. NWE is a buy with an average analysts’ next five years EPS growth per annum forecast of 7.60%. This is outperformance in the utility industry. The comparable numbers for a few other major utilities are: Consolidated Edison — 2.77% EPS growth, Southern Company — 3.30% EPS growth, and Duke Energy (NYSE: DUK ) — 4.52% EPS growth. There has been no insider selling on NWE. NOTE: Some of the fundamental fiscal data above is from Yahoo Finance. Good Luck Trading/Investing. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in NWE over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

BIK: Diversified Emerging Markets Means China, Right?

Summary The top 7 holdings are all Chinese, despite the ETF being labeled as diversified emerging markets. The standard deviation is pretty high and makes it difficult to try to use the ETF to lower risk across the total portfolio. On the positive side, the correlation is fairly low and the liquidity was solid which makes the statistics more reliable. I like investing in ETFs, and one of the ETFs I was looking at recently is the SPDR S&P BRIC 40 ETF (NYSEARCA: BIK ). It tracks the S&P BRIC 40 Index, and allocates at least 80% of the funds to the assets in the index. The Morningstar Category is “Diversified Emerging Markets”. However, after looking into it for a while I felt like it would be more representative to say the ETF is heavily invested in China. 67% of the ETF’s investments are in China. The only other markets included are Brazil, India, and Russia. I believe there are two methods for investing. Either you should know more than the other people performing analysis so you can make better decisions, or use extensive diversification and math to outperform most investors. Under CAPM (Capital Asset Pricing Model), it is assumed every investor would hold the same optimal portfolio and combine it with the risk free asset to reach their preferred spot on the risk and return curve. Do you know anyone that is holding the exact same portfolio you are? I don’t know of anyone else with exactly my exposure, though I do believe there are some investors that are holding nothing but the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). In general, I believe most investors hold a portfolio that has dramatically more risk than required to reach their expected (under economics, disregarding their personal expectations) level of returns. In my opinion, every rational investor should be seeking the optimal combination of risk and reward. For any given level of expected reward, there is no economically justifiable reason to take on more risk than is required. However, risk and return can be difficult to explain. I’ve been approximating risk by using the standard deviation of daily returns. Yields BIK has a 3.45% Distribution Yield and 2.65% SEC Yield. I believe a portfolio with a stronger yield is superior to one with a weaker yield if the expected total return and risk is the same. I like strong yields on portfolios because it protects investors from human error. One of the greatest risks to an otherwise intelligent investor is being caught up in the mood of the market and selling low or buying high. When an investor has to manually manage their portfolio, they are putting themselves in the dangerous situation of responding to sensationalistic stories. I believe this is especially true for retiring investors that need money to live on. By having a strong yield on the portfolio it is possible for investors to live off the income as needed without selling any security. This makes it much easier to stick to an intelligently designed plan rather than allowing emotions to dictate poor choices. In the recent crash, investors that sold at the bottom suffered dramatic losses and missed out on substantial gains. Investors that were simply taking the yield on their portfolio were just fine. Investors with automatic rebalancing and an intelligent asset allocation plan were in place to make some attractive gains. Expense Ratios The expense ratio for BIK is .50% for both gross and net expense ratios. Some analysts are heavily opposed to focusing on expense ratios. I don’t think investors should make decisions simply on the expense ratio, but the economic research I have covered supports the premise that overall higher expense ratios within a given category do not result in higher returns and may correlate to lower returns. The required level of statistical proof is fairly significant to determine if the higher ratios are actually causing lower returns. I believe the underlying assets, and thus Net Asset Value, should drive the price of the ETF. However, attempting to predict the price movements of every stock within an ETF would be a very difficult and time consuming job. By the time we want to compare several ETFs, one full time analyst would be unable to adequately cover every company. On the other hand, the expense ratio is the only thing I believe investors can truly be certain of prior to buying the ETF. I ran some historical numbers on the ETF and compared them to SPY to get a feel for how volatile the ETF was. My starting point was January 2012 and I ran the comparisons over a 3 year sample period. (click to enlarge) The portfolio had a 72.12% correlation to SPY when using daily values, which suggests a fairly significant connection. However, while SPY moved up substantially during the 3 year period, BIK had a fairly weak total return of only a few percentage points. In my opinion, it’s reasonable to think the daily correlation just reflects large amounts of money pouring in and out of the market. The returns over a long time period seem to be substantially less correlated to SPY. While SPY had a total return of 71.4% during that three year period, BIK returned only 4.95%. The liquidity looks solid with around 90,000 shares per day changing hands and 0 days in the last 3 years where the trading volume was 0. What are the holdings? Investors should at least glance at the holdings, even if they intend to buy an ETF on the premise that markets are efficient. By looking at the individual holdings the investors can check if the ETF will have a substantial overlap with other positions that they hold. In the case of BIK, investors should be aware of potential overlap with any other large holdings they have in China. (click to enlarge) Tencent Holdings Ltd. ( OTCPK:TCEHY ) is a Chinese investment holding company and Baidu Inc. ADR (NASDAQ: BIDU ) is a Chinese-language internet search provider. Outside of those 2, everything in the top 6 has China in its name. I assume most people are familiar with Alibaba (NYSE: BABA ). The first holding that isn’t in China is the 8th holding on the list. Conclusion BIK is an interesting ETF. At first it seems like it would be heavily diversified, but China is a fairly major position within the ETF. Therefore, when I am comparing BIK I may focus on comparing it to other Chinese focused ETF as much as I compare to other broadly diversified international ETFs. The standard deviation is very high, but I expect that for emerging markets. The total return for the sample period is quite sad, but the intent of diversification is to ensure a larger sample size that can reduce the overall level of deviations. However, the ETF does have fairly solid liquidity represented in both the average trading volume and the lack of days with shares changing hands. The yields are strong, which is a slight positive, but with the volatility of the ETF a retiring investor using it for yield would still be increasing the volatility of their portfolio. It’s a difficult call on which way to go in that regard and each investor would have to look at their personal tolerances. The ETF was at a significant premium to NAV when I looked. The expense ratio is not unreasonable for the exposure (emerging markets), but it did surprise that the emerging markets included so many major positions related to China. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.