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TECO Energy, Inc. (TE) Earnings: Can Coal Kick-start This Dividend Stock?

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TECO Energy, Inc. (NYSE:TE) reported earnings this week, making up at the bottom what it missed on its top line. With a 4.8% dividend yield and an increasingly cost-competitive, coal-centric portfolio, TECO shares are up 13% for 2013. Let’s take a look at the company’s latest report to see if there’s still upside for this dividend stock.

Number crunching
On the top line, quarterly sales stumbled, down 9.4% year over year to $661 million. Falling sales are a common trend across utilities, but TECO also failed to live up to analysts’ expectations of $668 million revenue.

But even as sales fell, TECO’s industry-defying margins pulled through once again, leaving the company with $41.5 million net income for Q1 2013. For investors, that translates to $0.19 adjusted EPS, a $0.05 decrease from Q1 2012 adjusted EPS. Still, TECO Energy, Inc. (NYSE:TE)’s earnings beat analyst expectations of an even larger drop to $0.17 for the most recent quarter.

Regulation station
Two factors dictate this dividend stock’s soar or stumble ahead: (1) its regulated utility rates and (2) natural gas prices.

TECO’s regulated utilities make up the majority of the company’s sales, pulling in $539 million (81%) of the company’s overall Q1 revenue. On the bottom line, its Tampa Electric Utility alone brought in more than 75% of TECO Energy, Inc. (NYSE:TE)’s net income.

But even though customers grew by 1.4% and profits managed a $400,000 increase from Q1 2012, the regulated utility suffers from out-of-date rates of return. Without a rate approval, the utility estimates its 2014 return on equity at just 6.74%. Compared to NextEra Energy, Inc. (NYSE:NEE)‘s Florida Power & Light’s current 11% ROE, TECO is lagging far behind its profit potential.

TECO Energy, Inc. (NYSE:TE) filed a rate request on April 5 and, if approved, Tampa Electric will enjoy 11.25% ROE by the start of 2014. Given the company’s current return levels, a rate approval is almost certain — but how much will depend on public sentiment, macroeconomic factors, and TECO’s regulatory relationship.

Will natural gas play nice?

With a recent dip in natural gas prices, coal-centric utilities could be setting themselves up for a serious comeback.

In addition to Tampa Electric’s reliance on coal for 61% of its generation capacity, TECO Energy, Inc. (NYSE:TE) also owns and operates coal mines and facilities in the Appalachians capable of processing more than 9 million tons of conventional coal annually.

FirstEnergy Corp. (NYSE:FE) relies on coal for a whopping 64% of its generation, while natural gas comprises just 6% of its capacity. The company’s Q1 earnings come out next Wednesday, and bullish investors will undoubtedly be on the lookout for higher 2013 guidance.

TECO Energy, Inc. (NYSE:TE)TECO’s rise could be slightly more subdued, given its Peoples Gas regulated subsidiary, as well as Tampa Electric’s reliance on natural gas for nearly all (39%) of its non-coal generation. Peoples Gas accounted for 33% of this quarter’s net income, and return on equity is currently expected to clock in around 10.75% for 2013. A hike in natural gas prices might mean maximized margins for coal, but it could also significantly drop People Gas’ profits.

A dead-end dividend?
TECO has raised its dividend 10% over the past five years as other companies cut theirs to balance books and free up funds for maintenance and modernization projects. With a current 4.6% yield, this dividend stock’s distribution beats 80% of its competitors.

But dividends can be a major drain, as evidenced by Exelon Corporation (NYSE:EXC)‘s and Atlantic Power Corp (NYSE:AT)‘s recent dividend haircuts. Exelon cut its dividend 40%, and Mr. Market has heavily rewarded its decision with a soaring stock price. Atlantic’s decision may have been too little, too late, as the utility’s 66% dividend division has been accompanied by a steep decline in share prices.

EXC Chart

Source: EXC data by YCharts.

With a 95% cash dividend payout ratio, TECO’s dividend is sustainable — for now. The company is nearing its cut-off point, and would do well to explore alternative spending scenarios to diversify its natural gas/coal risk.

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