A utility stock is often a good investment because of the moat and the potential for dividends, but these stocks also respond inversely to the economy. Utilities may do good business, but as the market rises they tend to get left behind when investors get confident and seek more adventurous waters. Now is a good time to check under the hood and get ready for when a great deal presents itself. Let’s see how a few particular power utility companies stack up.
Good deals exist
The company formed as IDACORP Inc (NYSE:IDA) purchased several smaller Idaho-based power companies, and there’s no reason the trend of acquisitions has to end. This is particularly possible because IDACORP Inc (NYSE:IDA) is rocking a 16.1% trailing profit margin, so there’s ready cash available for new purchases on the generation and transmission side of things.
Interestingly enough, I also think IDACORP Inc (NYSE:IDA) is a decent deal at this point. While the earnings multiple isn’t everything, the fact that the company is trading beneath the S&P 500 average at around 14 times earnings is significant. Also, the 3.1% dividend yield also indicates that this is a diamond in the rough. Pair those with a 1.4 book multiple, and you’ve got the makings of a solid deal. I recommend you check out IDACORP Inc (NYSE:IDA) for yourself.
Worth the price
NextEra Energy, Inc. (NYSE:NEE) is a Fortune 200 company that operates all over the US and somewhat in Canada. While some people see only currency woes working in two countries, I see the opportunity to take advantage of positive exchange rates and not one but two of the world’s sturdiest economies.
While I’m a fan of the huge, primarily green power-production capacity and diverse markets NextEra Energy, Inc. (NYSE:NEE) has through its subsidiaries, I really like FPL FiberNet. Since fiber optic communication is vital today and will become even more so as we settle further into the information age, this presents a huge and only partially tapped potential for growth.
NextEra Energy, Inc. (NYSE:NEE) carries a 12.2% trailing profit margin, which gives the company plenty of money to invest into bigger and better infrastructure. And I can’t lie, the 3.3% dividend yield is also pretty sweet.
However, nothing’s perfect. NextEra Energy, Inc. (NYSE:NEE) is trading at around 20 times its earnings, and that’s a bit pricey. In addition, being part of the Fortune 200 makes NextEra well known to mutual fund managers and thus a holding with a lot of takers. If a mutual fund manager ever wants to appear more “active,” buying and/or selling a few hundred thousand shares could put the share price in knots. Other than that admittedly small risk, I don’t see anything to keep you from taking a good look at NextEra Energy, Inc. (NYSE:NEE) and possibly buying it on its next dip.
Cleco Corporation (NYSE:CNL) is interesting because it has both regulated and unregulated energy businesses. In 2010, Cleco Corporation (NYSE:CNL)opened a facility that uses waste refinery coke among its other solid fuel sources, which takes advantage of the number of refinery operations there are in Louisiana. Cleco Corporation (NYSE: CNL) is great because it’s pulling 15.9% profit margins and trading for around 17 times earnings, which gives it the money to invest into expanding and a fairly reasonable price if you’re thinking of buying in.
However, there is a price to pay for being reasonably inexpensive. Using solid fuels, particularly those involving refinery-waste products, tends to be a pretty dirty affair. While the other two companies we discussed above are pretty green, Cleco Corporation (NYSE:CNL) is a good deal that’s less green. The 3% dividend could end up being cut if new regulations require cleaner standards, and sooner or later such regulations will probably be reality. Your mileage may vary, but I personally would hold off on buying Cleco unless it were trading at a very low price.
The Foolish bottom line
There are deals to be had in power utilities. This is particularly the case when the company is throwing off plenty of profit and can expand as it wants. The real bonus points happens when the company has an eye to the future and is taking proactive steps today.
The article Will These Power Companies Charge Your Portfolio? originally appeared on Fool.com and is written by Chris Hodge.
Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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