Often referred to as grandpa stocks for their stable dividend yields, utility and power companies are often ignored despite their attractive merits. While it may indeed be the case that most utility bets aren't the stuff of 30% annual returns, there are reasons today that these stocks warrant a closer look.
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The necessity of electricity is obvious for the most basic of reasons. Society cannot function without it. However as populations grow, the demand for electricity will grow with it. And the inputs of power generation, while abundant in the aggregate, are not free. Over time those costs are passed on to consumers, under the supervision of regulation, and we have to accept them.
As more and more people demand a product without an equal increase in supply at the same cost, prices will follow. And as our world progresses and advances, our demand for electricity goes up. More cellphones, more computers, more TVs in a house and electric cars will soak up more and more power. (For more, check out Trust in Utilities.)
So aside from the big boys like utility giant Duke Power (NYSE:DUK) which many know and like due to the 6% dividend, investors might want to look into others like Mirant (NYSE:MIR). Mirant is a Georgia-based power company that provides electricity in the Northeast as well as California. It's a $1.9 billion company with only $600 million in net debt, not a large sum for a utility company.
Duke is a $22 billion giant with over $15 billion in net debt. Mirant, however, trades at a P/E of 1.6 and a forward P/E of just under 8. In addition, this $13 stock has a book value of $30 a share. It doesn't pay a dividend but it appears attractive on most measures. (For related reading, check out Digging Into Book Value.)
For those investors who want the comfort of a yield, consider American Electric Power (NYSE:AEP). This utility yields nearly 5% and trades at 10 times forward earnings. The company's balance sheet is a little more leveraged than other utilities, but the stable cash flows that come from electricity sales are a comfort.
Those looking for an international play can tap into Huaneng Power (NYSE:HNP), a Chinese power company that delivers electricity in China and Singapore. It's one of the largest power producers in China. It's increasing its exposure to areas such a wind power, a booming industry in China. After suffering a loss in 2008, the company has returned back to its profitable ways. However, it's always a good idea to look at foreign companies with a little more skepticism due to issues surrounding accuracy of foreign financial statements.
Boring is Not Bad
In uncertain market environments, boring businesses can be great investments. Some utilities, despite appearing boring, could actually offer investors a little spark in their portfolios. (For more, check out Utility Funds: A Bright Choice In Bear and Bull Markets.)
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