Utilities are a core component of any income-oriented portfolio -- heck, the whole reason many investors own them in the first place is that the stocks regularly send dividend checks to shareholders. Let's look a little more closely at this sector - and at three names that yield about 4.5% or higher.
Sector Overview
On the plus side, many utilities are monopolies in their markets. Some are even granted that privilege by their state governments.
But on the downside, these firms are usually heavily regulated, especially at the federal level. State public-utility commissions also typically regulate the prices that companies can charge, and hence the profits that firms make. That tends to limit these stocks' earnings potential.
The sector is also very interest-rate sensitive. Rising interest rates (which the United States seems to be facing right now) typically presage a utility-sector sell- off.
But in spite of these drawbacks, income-seeking investors should have at least a few utilities in their portfolio. Here are some names to check out, listed in declining order of dividend yields:
PPL Corp. (PPL)
PPL provides power in Pennsylvania, Kentucky and the United Kingdom and offers investors an attractive 5.84% yield. PPL is also currently bouncing off of a 52-week low, and is trading just below its 200-day exponential moving average.
The company's debt-to-assets ratio is 48%, while EBITDA is 52% of gross revenue. This means the company has ample cash to fund its interest payments. (Its interest-coverage ratio is 4.33.)
Gross revenues did decline to $7.6 billion in 2017 from $11.8 billion in 2013, but investors shouldn't be overly worried about that. The same thing has happened to lots of U.S. utilities over the same timeframe. It's a function of increased energy efficiency.
Southern Corp. (SO)
Southern provides power to customers in the southern United States. Unlike some utility markets that have opted for a more open-market structure, this region generally has bilateral contracts between utilities and municipalities, giving utilities more power in negotiations.
Southern currently yields a little over 5% and has seen a nice bump in gross revenues, which increased from $17 billion in 2013 to $23 billion in 2017. The company's debt- to-asset ratio is a very manageable 40%, while its interest-coverage ratio is an adequate 3.67. (EBITDA is 27% of gross revenue.)
The one concern with SO is its high dividend-payout ratio of 210%. However, utilities are typically heavily dependent on debt financing for operations. So, it wouldn't be unheard of for this ratio to remain high without Southern having to cut its dividend. Still, some caution seems warranted.
Dominion Energy (D)
Dominion provides power in Virginia and North Carolina and is currently in discussions to acquire SCANA Corp., which supplies power to South Carolina.
The company has seen its gross revenue fluctuate between $11.6 billion and $13.1 billion over the past five years, but its debt-to-asset ratio remains a manageable 40%. More importantly, the firm is now converting nearly 50% of its gross revenue into EBITDA -- a percentage that's been rising for the past five years.
The firm's interest-coverage ratio is also above 5.0, giving Dominion ample safety relative to its interest payments. And while the stock offers a generous 4.8% dividend yield, it has just a 67% dividend-payout ratio, giving income-oriented investors plenty of margin for safety.
Best of all, D is in a short-term uptrend and is trading right below the 200-day exponential moving average.
(This article was originally sent this month to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Hale Stewart, Peter Tchir, Jonathan Heller and others.)
