MGE Energy has a modest dividend of 2.9% with a very reasonable 55% payout ratio. It has an operating margin of 21%, which will continue to increase as MGE Energy embarks on its cost reduction and efficiency projects. The company has made a conscious shift from issuing shares to fund asset expansions to using retained earnings.
Over the past decade, MGE Energy went from $650 million in generating and distribution assets to $1.6 billion in assets, an annual growth rate of 8.5%. With a constant share count, I expect to see these assets accelerate earnings per share as time moves forward.
Consolidated Edison serves the most densely populated area in the US, New York City. ConEd makes most of its money distributing electricity and natural gas to New Yorkers, and like most utilities, has a monopoly on these services.
ConEd’s dividend is marginal at 3.9% and the company has a relatively conservative payout ratio of 62.3 %. Consolidated Edison’s distribution network will make money regardless of electric and gas prices, as it charges customers for the use of its wires and pipes while passing through the cost of electricity. This is a great business model that eliminates much of the risk associated with commodity-price fluctuations. Other utilities that have large electricity wholesale divisions are held hostage to commodity price swings like coal and natural gas.
ConEd’s business model also insulates it from governments administrations that support changing sources of energy by being the middle man. When the current administration pushed for more restrictions on coal power, ConEd continued its business as usual with minimal impact compared to competitors like Southern Company.
Foolish bottom line
Companies like SolarCity Corp (NASDAQ:SCTY) are currently reducing the demand of electricity from the grid. Even though the company has growing revenue, it is still struggling to make a profit. Unless SolarCity Corp (NASDAQ:SCTY) is able to drive down the costs it incurs during installations, or build up another revenue stream these loses will eventually be the demise of this renewable energy company.
Electric utilities may see some consumers severing the cord and removing themselves from the grid. Customers will continue to try and make their homes as efficient as possible, however most customers will continue to be plugged into the grid.
City dwellers will continue to depend on the grid for reliable flows of electricity and gas. As time moves forward, electric companies will still pay an integral part of generation and distribution of electricity. Consolidated Edison and Duke Energy Corp (NYSE:DUK) are pillars of stability, and will provide strength to any investor’s portfolio.
The article The Grid and the Green Energy Threat originally appeared on Fool.com.
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