Sustainable Utility Investing: A Surprisingly Profitable Approach
May 3rd 2012 1:31PM
Updated May 3rd 2012 1:32PM
There are roughly $3 trillion in assets under management in the social responsibility investment sector in the U.S. alone -- that number is expected to grow to $9 trillion by 2015. The fact is, investors are more socially aware than ever before, and they're interested in rewarding companies that behave in socially responsible ways.
Target Rock Advisors CEO Richard Rudden is busy providing the tools to make social responsibility investing not only easy, but also profitable. And they have a surprising niche: utilities.
"Utilities are rarely considered candidates for the large and rapidly growing number of socially responsible investing funds," Rudden says. "But we want to call attention to the industry for people looking for more income producing steady growth in their portfolio."
To create their sustainability indexes, Target Rock scores utilities based on economic, environmental, and social factors.
-- Using 10 years of technical analysis, Target Rock builds up its indexes using an approach that is both objective and scientific. Financial health, stability, and regional development are key factors.
-- A close look into emissions and emissions reporting, energy efficiency, and demand-side management.
-- Employee health, safety, and development as well as corporate governance are carefully considered in the scoring.
He and co-founder Kyle Rudden tell Kapitall their "triple bottom line" has led to some impressive index results. Indeed, their High Sustainability Utility Index -- which contains the 15 names listed below -- has an average 61% payout in earnings average growth, and is anticipated to grow 6% in earnings this year -- numbers that are pretty strong for the utilities sector.
The stocks on the index, Rudden says, have the ability to maintain that payout level, if not increase it. Many of the names have a consistent 3.7% annual growth in dividends. "Using the index is a safe way to play the defensive utilities, knowing that they've been carefully and expertly screened."
The indexes were created with two purposes: The first is to inform investors about socially responsible investing. The second is to address the lack of definition in approaches to sustainability.
Rudden believes that through their indexes the utility industry can establish benchmarks and standards to use in future sustainability assessment. "Since we've gone to market with these indexes we have gotten some inquiries as to how scores are created and how utilities can improve their score."
In general, people are thinking more about where they make their investments, and as demographics get older they are looking for more income producing steady growth. "The time for this index is really right for those two reasons," Rudden says.
Altogether Target Rock has 10 indexes based on scores of high, mid, and low sustainability. Naturally, the high sustainability index is the most popular. Here are the names on that list, their dividend yield, and Target Rock's component weighting.
What do you think? Are sustainable dividend utility stocks right for your portfolio? (Click here to access free, interactive tools to analyze these ideas.)
1. Sempra Energy: Engages in the development of energy infrastructure, operation of utilities, and provision of energy-related products and services worldwide. Component weighting 7%. Most recent closing price at $65.06. Market cap at $15.66B. Dividend yield 3.7%.
2. PG&E: Operates as a public utility company that engages in electricity and natural gas distribution primarily in northern and central California. Component weighting 6.8%. Most recent closing price at $44.19. Market cap at $18.61B. Dividend yield 4.11%.
3. Avista: Engages in the generation, transmission, and distribution of energy and other energy-related businesses in the United States and Canada. Component weighting 6.8%. Most recent closing price at $26.35. Market cap at $1.54B.Dividend yield 4.4%.
4. Edison International: Engages in the supply of electric energy in central, coastal, and southern California. Component weighting 6.8%. Most recent closing price at $44.27. Market cap at $14.42B. Dividend yield 2.93%.
5. Unitil: Engages in the distribution of electricity and natural gas in the states of New Hampshire, Massachusetts, and Maine. Component weighting 6.6%. Most recent closing price at $26.38. Market cap at $289.9M. Dividend yield 5.23%.
6. Xcel Energy: Engages in the generation, purchase, transmission, distribution, and sale of electricity to residential, commercial, and industrial customers, as well as to public authorities in the United States. Component weighting 6.87%.Most recent closing price at $27.06. Market cap at $13.18B. Dividend yield 3.84%.
7. Pinnacle West Capital: Provides retail and wholesale electric services primarily in the state of Arizona. Component weighting 6.75%.Most recent closing price at $48.23. Market cap at $5.27B. Dividend yield 4.35%.
8. American Electric Power (NYS: AEP) : Engages in the generation, transmission, and distribution of electric power to retail customers. Component weighting 6.63%.Most recent closing price at $38.88.Market cap at $18.81B.Dividend yield 4.83%.
9. Duke Energy (NYS: DUK) : Operates as an energy company in the Americas. Component weighting 6.6%.Most recent closing price at $21.53.Market cap at $28.80B.Dividend yield 4.64%.
10. Southern Co. (NYS: SO) : Operates as a utility company that provides electric service in the southeastern United States. Component weighting 6.71%.Most recent closing price at $46.14.Market cap at $40.09B.Dividend yield 4.24%.
11. IdaCorp: Engages in the generation, transmission, distribution, sale, and purchase of electric energy in the United States. Component weighting 6.44%.Most recent closing price at $40.51.Market cap at $2.02M.Dividend yield 3.25%.
12. Wisconsin Energy: Engages in the generation, distribution, and sale of electric energy and steam. Component weighting 6.44%. Most recent closing price at $36.68. Market cap at $8.45B. Dividend yield 3.27%.
13. NextEra Energy (NYS: NEE) : Engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. Component weighting 6.44%. Most recent closing price at $63.79. Market cap at $26.6B. Dividend yield 3.76%.
14. Progress Energy: Engages in the generation, transmission, distribution, and sale of electricity in North Carolina, South Carolina, and Florida. Component weighting 6.47%. Most recent closing price at $53.34. Market cap at $15.79B. Dividend yield 4.65%.
15. Entergy (NYS: ETR) : Operates as an integrated energy company in the United States. Component weighting 6.62%. Most recent closing price at $66.3. Market cap at $11.74B. Dividend yield 5%.
Interactive chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
At the time this article was published Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Price data from market close May 2, 2012. Interview with Kapitall Wire May 2. Motley Fool newsletter services have recommended buying shares of Southern. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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