2 Low Beta Utility Dividend Stocks Beating The Market

Looking for low beta dividend stocks, that don’t march to the beat of the market? It’s a common theme these days, with P/E’s of traditional value stocks and defensive stocks getting a bit stretched. Thanks to their dividend yields, and defensive attributes, normally stodgy Utilities stocks have led the pack in 2016, by a wide margin:

With this market-leading success in mind, we wondered if there were any low-beta utility dividend stocks left, which were still reasonably priced. We came up with two stocks, Public Service Enterprise Group, (PEG), and South Jersey Industries, (SJI), both of which have low betas, and a dividend yield over 3%.

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5 Utility Dividend Stocks With Upside Potential

by Robert Hauver

With the S&P 500 finally in positive territory year-to-date, we took a look at what’s been working in 2016. Topping the list is the Utility sector, which has been the go-to sector for income investors, and even non-income investors in this volatile market.

Healthcare, formerly the leading sector for quite a while, has fallen out of favor, thanks to political headline risk due to prescription overpricing by some firms. meanwhile, the Utility sector is up over 12% in 2016, leading all others by a wide margin. Even the resurgent Energy sector, which is up 12% over the past month, trails Utilities by a wide margin:
With all of the strong price performance in the Utility sector, we wondered if there were any dividend stocks left that weren’t already above their consensus analyst price targets. We came up with these 5 stocks…
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Excelon (EXC) – A Utility Dividend Stock With Steady Growth Prospects

By Robert Hauver

Excelon, (EXC), is one of many dividend paying stocks in the Diversified Utility stocks sub-group, but what sets EXC apart from its peers are its abundant superior management, valuation and growth metrics, in addition to its wide moat within the reemerging nuclear energy production arena.  Exelon delivers electricity to approximately 5.4 million customers in northern Illinois via ComEd and southeastern Pennsylvania via PECO, as well as natural gas to 486,000 customers in the Philadelphia area via PECO. (EXC is listed in the Utilities section of our High Dividend Stocks by Sector tables).

With the BP Gulf disaster in the news every day, proven alternative energy sources are looking more attractive than ever. In a recent forum, Excelon CEO John Rowe called for the Senate to pass the pending energy bill that would put a price on carbon emissions, stating, “As the nation’s largest nuclear operator, Excelon also appreciates that the senators have recognized nuclear power as a low-emission source of baseload electricity, with an important role to play in the country’s transition to a low-carbon economy”.

As the lowest carbon emitter in the industry, Excelon stands to benefit from carbon cap and trade legislation.  EXC also created a new subsidiary in 2009, Excelon Transmission Co., which benefits from the expertise of former Federal Energy Regulatory Commission, (FERC) member Betsy Moler,  EXC’s VP of Gov’t Affairs and Public Policy.  Excelon’s website says that Ms. Moler led the FERC “landmark efforts  on open access and promoting competitive markets”. The subsidiary will focus on ways to capitalize on the expected $60 – $100 billion US investment in transmission over the next 10 years, such as moving “renewable  energy from the upper midwest and the Dakotas to population centers”, mitigating oversupply, improving reliability, and reducing congestion. (Source: Excelon website).

EXC’s two other divisions, ComEd and PECO, “will make up to $725 million in “smart grid” investments in Illinois and PA over the coming years”, and should give EXC a “regulated return on investment and stable earnings growth”.  PECO has already been awarded the maximum allowable grant of $200 million by the US Dept. of Energy for their current smart grid project in Philadelphia.

PECO has also filed for approvals to increase its annual electric and natural gas delivery revenues by $316 million and $44 million, respectively, beginning January 1, 2011.

Here are the figures of our Industry Comparison:

Excelon Diversified Utilities Group
P/E 9.38 16.23
Long-term EPS Growth 19.00% 5.00%
PEG 1.18 3.17
Profit Margin 16.09% 7.64%
Debt/Equity .97 1.30
Price/Cash 10.18 89.01
ROE 21.55% 9.96%
ROA 5.51% 2.86%
ROI 6.07% 3.38%
Dividend Yield 5.50% 5.01%

Excelon currently has a 50.58% dividend payout ratio, and pays a $.525/share dividend quarterly.  Their most recent ex-dividend date was May 12th, with a payout date of June 9th.

There are also options available for Excelon.  Our Covered Calls table currently lists the Jan. 2011 $40.00 call, which nets $2.25/share in call option premium and $1.05 in dividends. At Friday’s $38.74 price, your static/unassigned yield would be 8%. The break-even is $35.44.  If EXC rises to around $42.30 or higher, your underlying shares will most likely be assigned, giving you an additional $1.26/share profit, or 3%. The total assigned yield would be 11% for just under 8 months, or 17.7% annualized.

Investors looking for a lower entry point could sell cash-secured put options, and get a $34.40 break-even. The Jan. 2011 $37.50 put was bid at $3.10 today, which equals an 8% nominal yield, or 12.89% annualized.

Disclosure: No positions in EXC at this time.

Disclaimer: This article is written for informational purposes only.

FPL – A New Model: Solar Energy With Natural Gas

By Robert Hauver

The Florida-based utility, FPL Group, is investing heavily in a new Energy plant model, one that combines Solar with Natural Gas.

In 2010, FPL will build the world’s second-largest solar plant, on 500 acres north of West Palm Beach, Florida.  The innovation of this project is that it will harness solar power on an industrial scale, by retrofitting a natural gas fired plant with solar as a backup energy source.  By using solar power in tandem with natural gas, FPL will be able to cut its natural gas use at the plant during times when it needs the most power, namely the intensely hot Florida summers.

This plant will also be a test of how much you can reduce the cost of solar power, by combining it with natural gas.  FPL hopes to cut costs by 20% with this hybrid model, since it won’t have to construct new steam turbines and power transmission lines.  The solar part of this plant will generate 75 megawatts at peak times, while the natural gas part will generate approx. 3800 megawatts.  (One megawatt can power approx. 150 homes).

This natural gas/solar energy model will hopefully help to solve the problem of having a stable, but renewable energy source.  Utilities are being pushed by legislators at state, local and federal levels, to come up with renewable power solutions that reduce carbon emissions, but, since wind and solar energy are sometimes intermittent, maintaining a steady power supply with only these energy sources can often be challenging, and costly. FPL’s use of cheap natural gas in tandem with solar energy in Florida, the “Sunshine State”, could solve the power reliability problem, reduce carbon emissions and foreign oil usage, and provide a working model for harnessing solar power in an economic manner.

The Utilities sector is known for its dividend paying stocks.  FPL closed at $48.16 on Friday, Mar. 19th, and currently pays $2.00/year, a 4.15% dividend yield.  There are also call options and put options available, for investors looking to sell covered calls or cash-secured puts. (See our Covered Call table).  The Jan. 2011 $50 call closed at a bid of $2.15 yesterday, a 4.5% nominal yield.  If the shares are assigned, this covered call trade would also net the call seller an additional $1.84 in price appreciation, for a total return of $5.49, an 11.4% yield, over a 10-month term, or 13.78% annualized.