Electric utilities, facing a myriad of continuous changes in their industry, mostly remained flat or slightly down in their earnings this recession. While most of these power companies, known for their slow growth but often handsome dividends, are looked upon as dull income investments, their industry is anything but dull right now.

IN PICTURES: Digging Out Of Debt In 8 Steps

Cash for Contracts
Stung recently by a unique power auction in May, which effectively lowered some of its rates, Midwest electric giant First Energy (NYSE: FE) responded to unfavorable market rates by implementing a unique program of paying municipalities cash up front in exchange for long-term commitments. In addition to the municipalities receiving millions for signing on, customers in these communities will also receive some discount on their power charges while First Energy will have increased stability and predictability with future earnings. Many investment analysts regard the move favorably, if not as "brilliant".

Duke Goes to China, Gets Green
With cap-and-trade in the air for utilities, many of the large power companies are rushing to get involved in more green power activities. Duke Energy (NYSE: DUK), whose stock has languished in a trading range this past year, signed deals to help develop low carbon power in China. The latest deal will help develop solar and other alternative energy with ENN Group, which is similar to another deal Duke signed recently with China Huaneng Group.

Earnings Mostly Flat, How About the Stocks?
First Energy's stock was cited in a positive note with its strong second quarter, its relatively low PE between 10 and 11, and its attractive 4.7% dividend yield. Despite this, the company's high 1.6 debt-to-equity was mentioned as a caution, and it should be pointed out that while income and revenues are projected to be better in 2011, there is equally neutral or bearish sentiment on the stock. Also the year-over-year income trend is actually down, not up, from $4.57 per share in 2008 to a projected $3.76 this year with next year's estimates pegged at $3.57. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Similar Big Power Companies
Consolidated Edison, (NYSE: ED), the New York power behemoth has an attractive 6% yield, and Southern Company (NYSE: SO) has a 5% dividend yield. Edison International (NYSE: EIX) has recently been mentioned as being undervalued. A detailed analysis of Edison's financial performance, however, was more lukewarm on the stock's growth and profitability.

A Look Forward

Electric utilities will continue to be roiled by continuing changes in their industry, from the green/carbon issues to the regulatory issues, along with demand issues related to the speed, or lack of it, as the economy eventually moves out of recession into recovery. Possible consolidation looms industry wide, and utilities are already competing with each other in regions far from their main bases of operation. The days of sitting back and collecting dividends without looking at the business underlying the stocks is long over.

There is still value in these companies as the best ones will adapt and continue to produce top line revenue which will ultimately fuel those rich dividends and potential growth. That said, for those interested in investing in electric utilities, in the near term, keep checking their revenues and earnings and watch for the ones that will produce revenues in what were once non-traditional ways. This will give more opportunity as the company will be less dependent on regional economies. (For a related reading on utilities, check out Trust In Utilities.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  2. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!