The western world runs on electricity and the companies that deliver it are a mixture of public and private companies or invest owned. For the public companies as ensuring the delivery of electricity is a very capital business, all utilities must go to bond market for financing. In terms of investor owned, the beauty of the business is thousands of people owing bills every month and if you do not pay, the company can turn off the lights. If things are reasonably normal, the investor owned utilities should provide a consistent dividend year after year. What which one is the good one to buy?
Michael Bowman from Wickham Investment Counsel helps you to start he first narrowed the field to companies larger than $ 1 billion in market capitalization (share price x number of shares outstanding). He can up with 23 companies.
Mr. Bowman’s article was in the Globe and Mail, December 18, 2013
Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. michael@wickhaminvestments.com
What are we looking for?
My colleague Rob Belanger and take a look at the U.S. electrical utility sector.
The screen
We ranked our companies by market capitalization and all had to be over $1-billion.
The price-to-earnings ratio (market value per share divided by earnings per share) has been used for more than 100 years to measure value and remains one of the most relevant metrics for comparing companies within a particular sector. Ideally we are looking for a low number.
Operating margin is a measurement of what portion of a company’s revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 9.5 per cent it means that it makes 9.5 cents, before interest and taxes, for every dollar of sales. A high number is preferable.
Retail sales are megawatt hours sold to residential, commercial, industrial, and other retail customers. Wholesale sales are megawatt hours sold to other utility systems in the same state, or elsewhere in the United States.
What did we find?
Atlanta-based Southern Co. owns four electrical utilities in the Southeast U.S., three nuclear power plants and a state-of-the-art coal gasification facility. Southern has one of the highest yields, a P/E of 15.06, and an operating margin of 32.71.
The most overvalued company on a P/E basis is Oklahoma-based OGE Energy Corp., which has a P/E of 20.68. OGE pays out the smallest dividend on the screen, yet has one of the highest operating margins.
American Electric Power sells wholesale electricity to 11 states through 350,000 kilometres of distribution lines. They sold more wholesale megawatt hours than any other company on our list.
Scana Corp. is the most undervalued firm on a P/E basis.
Investors would be well advised to conduct further research, or to contact an investment professional.
| Company | Ticker |
|---|
| Allete Inc. | ALE-N |
| Alliant Energy | LNT-N |
| Ameren Corp. | AEE-N |
| American Electric | AEP-N |
| Avista Corp. | AVA-N |
| Black Hills Corp. | BKH-N |
| Cleco Corp. | CNL-N |
| CMS Energy Corp. | CMS-N |
| Dominion Resources | D-N |
| DTE Energy Co. | DTE-N |
| Duke Energy Corp. | DUK-N |
| El Paso Electric | EE-N |
| Great Plains Energy | GXP-N |
| Idacorp Inc. | IDA-N |
| NV Energy Inc. | NVE-N |
| OGE Energy Corp. | OGE-N |
| PNM Resources | PNM-N |
| Scana Corp. | SCG-N |
| Southern Co. | SO-N |
| Teco Energy Inc. | TE-N |
| Westar Energy Inc. | WR-N |
| Wisconsin Energy | WEC-N |
| Xcel Energy Inc. | XEL-N |
| Market Cap (US$-bil) | P/E | Current Dvd Yld % | Operating margin % | Retail Sales in MWh (millions) | Wholesale Sales in MWh (millions) | Total Electric Customers (in millions) |
|---|
| 2.07 | 18.92 | 3.91 | 15.30 | 11.09 | 2.00 | 0.015 |
| 5.98 | 15.27 | 3.66 | 23.24 | 25.59 | 4.77 | 0.989 |
| 8.48 | 17.08 | 4.58 | 34.62 | 81.68 | 18.29 | 2.400 |
| 23.56 | 14.59 | 4.21 | 24.40 | 171.47 | 41.89 | 5.309 |
| 1.64 | 16.14 | 4.47 | 10.50 | 8.86 | 3.73 | 0.360 |
| 2.34 | 18.43 | 3.05 | 21.38 | 4.60 | 1.99 | 0.202 |
| 2.93 | 18.07 | 3.06 | 35.52 | 8.72 | 1.89 | 0.283 |
| 7.39 | 17.03 | 3.84 | 21.87 | 33.76 | 6.04 | 1.790 |
| 38.99 | 20.27 | 3.48 | 30.13 | 76.72 | 4.03 | 2.466 |
| 12.26 | 16.72 | 3.92 | 13.57 | 43.45 | 5.20 | 2.100 |
| 50.94 | 16.86 | 4.52 | 26.01 | 205.25 | 30.87 | 7.136 |
| 1.48 | 15.12 | 2.97 | 30.39 | 7.72 | 3.31 | 0.384 |
| 3.69 | 16.01 | 3.83 | 35.52 | 22.99 | 6.28 | 0.825 |
| 2.72 | 15.32 | 2.97 | 30.32 | 14.09 | 2.18 | 0.501 |
| 5.91 | 18.51 | 3.12 | 36.47 | 29.19 | 0.85 | 1.200 |
| 7.01 | 20.68 | 2.18 | 36.08 | 28.00 | 1.40 | 0.798 |
| 1.96 | 17.94 | 2.76 | 29.45 | 17.29 | 2.30 | 0.739 |
| 6.92 | 13.52 | 4.35 | 24.26 | 21.28 | 2.60 | 0.670 |
| 37.48 | 15.06 | 4.98 | 32.71 | 156.05 | 27.56 | 4.436 |
| 3.87 | 17.66 | 5.24 | 18.34 | 18.41 | 0.27 | 0.684 |
| 4.02 | 13.62 | 4.31 | 32.26 | 19.94 | 7.72 | 0.690 |
| 9.16 | 17.52 | 3.78 | 24.50 | 27.04 | 3.21 | 1.126 |
| 14.64 | 14.33 | 3.97 | 23.57 | 89.20 | 15.78 | 3.429 |
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