Electric Utilities Grind Through Recession

By Greg Sushinsky | September 25, 2009 AAA

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.

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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.)

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