Tuesday, August 05, 2008

Dog Days of Summer

Investors need cool returns to assuage the hot, sultry days of mid-summer. As air conditioners hum along, soaking up watt after watt of precious electricity, the coolest returns are likely from the strongest utilities in the country.

This may seem counter intuitive since the cost of fuel is an issue for utilities just like everyone else. However some utilities have been quietly kicking the oil habit and otherwise finding ways to deliver more to the bottom line.

Since Duke Energy (DUK: NYSE) is trading near its 52-week low, it offers a 5.3% dividend yield. Duke has been among the leaders in solar and wind energy generation and its recent earnings performance demonstrates the wisdom of energy diversification. Earnings growth is forecasted at a tepid 5.0% over the next five years, but we believe this should not be taken at face value. Duke Energy has been on a tear, trouncing the consensus estimate in each of the last four quarters. Trailing net profit margin is a tidy 12.7%.

Pinnacle West Capital Corp. (PNW: NYSE), the Arizona utility, sits near the top of the list in terms of dividend yield. Current dividend yield is 6.4%. Its energy sources are becoming more diversified each year, encompassing coal, nuclear and solar sources. The stock is trading at 13.3 times forward earnings, having floundered in anticipation of less than spectacular revenue and earnings in the June 2008 quarter. Reported revenue was flat and earnings only beat estimates after one-time additions. Yet net income excluding the one-time additions represented a net profit margin of 11.2%. Nothing to bark at in that performance!

Great Plains Energy (GXP: NYSE) operates in America’s heartland as Kansas City Power and Light. Great Plains recently completed the acquisition of Aquila, a Missouri electric utility that previously traded under the symbol ILA on the NYSE. I love an “efficiency” story. The combination is expected to result in over $500 million in savings over the next nine years to Great Plains' expanded customer base of 800,000 residential and business customers. Great Plains also offers two programs to customers to interconnect renewable generation equipment to its power grid. They will need the break as Great Plains recently instituted a fuel surcharge. The stock currently earns a 6.7% dividend yield and trades at 14.6 times forward earnings.


The author of the Small Cap Copy web log has a a beneficial interest in PNW shares.

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