2 Utilities to Buy and 1 to Avoid
Sep 27th 2013 9:00AM
Updated Sep 27th 2013 9:02AM
Utilities are pillars of slow-and-steady investing, favored by their shareholders for their reliable results and strong dividends. Investors who need income, such as those in or nearing retirement, especially prefer utilities.
At the same time, though, not all utilities are created equal. Poor execution and management instability can cause just as much distress to a utility as it can to any other company, and there are definitely utility stocks performing better than others right now.
Slow and steady wins the race
One of the most well-regarded utilities is Dominion Resources , a $36 billion company by market capitalization that has well served both consumers and shareholders alike for many years.
Dominion is performing strongly to start the year, and the remainder of the year should be strong. The company is excelling, reporting increasing revenues due to higher rate adjustments, and also improving performance from its electric service and gas transmission projects. This is how Dominion produced 5% operating earnings growth in the second quarter, and why it's expecting another 3% growth in the current quarter.
Dominion uses its strong business to handsomely reward shareholders through a compelling dividend that has stood the test of time. Dominion recently paid its 342nd consecutive dividend, a streak amounting to nearly 86 years.
I've written favorably about PPL Corporation , a utility that offers a unique twist of operating on two continents. PPL's business is split between the United States and the United Kingdom. There isn't anything terribly exciting about PPL, but utility investors should view that as a plus. PPL simply goes about its business, and offers investors a well-supported 5% dividend yield.
Why the future is bright for Dominion and PPL
Both Dominion and PPL have plenty of room in the future to keep paying and raising their already-strong dividends. That's because each has a well-entrenched strategic vision to ensure growth. From 2013 to 2017, Dominion is planning $3 billion in annual capital expenditures to improve and build out its infrastructure; it's planning to spread its investments across its business units. In total, Dominion points investors to more than 40 growth projects in process.
For Dominion, these initiatives are already paying off. The company is excelling, reporting increasing revenues due to higher rate adjustments, and also improving performance from its electric service and gas transmission projects. This is how Dominion produced 5% operating earnings growth in the second quarter, and why it's expecting another 3% growth in the current quarter.
Meanwhile, PPL has different plans to grow profits. PPL is targeting focused cost reductions to provide additional financial flexibility. The company anticipates lower costs through 2017 from reduced capital expenditure requirements. In all, PPL is targeting $1.1 billion in lower capital expenditures from 2013 to 2017, which should help boost profitability down the road.
This should help lessen the blow of PPL's impending debt maturities. The company faces more than $3 billion in debt maturities by 2016, so shoring up the balance sheet now is likely a shrewd move by management.
A less-than-rosy outlook for this utility
One utility with a much cloudier future than Dominion or PPL is Exelon . Exelon is the largest owner and operator of nuclear plants in the United States, but to be blunt, nuclear isn't doing very well right now. The first half of the year has been brutal for Exelon, which reported a loss in the first quarter and second-quarter net income that fell 13% year over year. The problems are easy to pinpoint: Exelon's nuclear operations are extremely weak. Its nuclear business saw higher costs and a drop in production, as measured by total gigawatt-hours, in the second quarter.
It's because of these struggles that the company was forced to cut its dividend earlier this year; a huge no-no for any utility stock that wants to keep a loyal investor base. Exelon slashed its dividend by 41% and quickly saw its shares lose more than a quarter of their value in just a few months.
Strong utilities will power up your portfolio
Utilities are often referred to as 'widow and orphan' stocks, the type that provide slow-and-steady growth and reliable dividends, year after year. At the same time, however, investors need to perform the same due diligence with utility stocks as they do with any other stock. These are equities, after all, which always carry the risk of loss. Even utilities, once they lose their way, can cause pain for their shareholders.
Exelon investors know that all too well, and as a result, it's critical to monitor utilities on a regular basis to make sure they're managing costs and maintaining strong profitability. That's why, in the present time, utility investors should prefer Dominion and PPL over Exelon.
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The article 2 Utilities to Buy and 1 to Avoid originally appeared on Fool.com.Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources and Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.