Utilities are among the most stable companies in the world. In a yield-starved world, however, the shares of such companies have become a lot more exciting than their boring images might suggest. This includes a long period of share-price increases off of 2007-2009 recession lows and, more recently, a sell-off. For patient income investors, however, the sell-off could be a great buying opportunity. Put The Southern Company (NYSE:SO), El Paso Electric Company (NYSE:EE), and Duke Energy Corp (NYSE:DUK) on your watch lists.
Widows and orphans
Utilities are the typical widow and orphan stocks. They provide a service that everyone needs, have massive customer bases, often have a regional monopoly, are generally heavily regulated, and many pay regular and increasing dividends. That isn’t to say that utilities are risk free, only that these businesses are pretty good ones to own if you are looking for regular and secure dividends.
However, over the last month, utility companies have started to trade lower. While there are any number of reasons for the sentiment switch, long-term income investors shouldn’t pay too much attention to market noise. If low yields have kept you on the sidelines, now is the time to make a list of utilities that you would like to own—if only the yields were higher.
Growing markets
The Southern Company (NYSE:SO) is one of the largest utilities in the country. It serves around 4.4 million customers across Florida, Georgia, Mississippi, and Alabama. Despite a conservatively run merchant power operation, it is a pretty standard electric utility. And, it has a long history of regular dividend increases.
What makes the company interesting is that it operates in markets with growing populations and has good relationships with its regulators. So, there is notable opportunity for organic growth. Moreover, the company is in the process of upgrading its power-plant fleet with the construction of nuclear and coal gasification plants.
These are large and expensive projects, so they pose some risks. However, they are also likely to keep the company’s fuel costs low and lead to rate increases as construction costs are passed onto customers. The shares yield around 4.5%. If the yield goes into the 5.5% to 6.5% range, income investors should jump aboard.
Growth, but a low yield
The portfolio manager noted that the population at Fort Bliss in El Paso Electric Company (NYSE:EE), Texas has tripled in the past seven years and that it is being considered as an Air Force training center. That would likely mean more staff and increased electricity demand. That would be nice if it happens, but far more certain growth is on tap from air conditioning.
While air conditioning may be commonplace in some markets, Gabelli reports that “only 35% of El Paso Electric Company (NYSE:EE), [Texas] residences have refrigerated air conditioning, but 99% of new residences install central air conditioning.” So, as new homes are built for a growing population, electricity usage should also increase at a more rapid clip.
El Paso has a relatively low yield and a short dividend history. That said, if a utility sell off led to a yield in the 4% range, income investors would do well to take a look.
Merging opportunities
Duke Energy Corp (NYSE:DUK) serves even more customers than The Southern Company (NYSE:SO), with some 7.2 million customers in six states in the Southeast and Midwest. The company is a pretty boring utility after buying Progress Energy for nearly $14 billion.
That’s a big deal and management is working to integrate the two companies so it can achieve fairly aggressive cost savings. Most of those savings are to be passed on to customers, so missing the targets would be bad for shareholders. However, Duke Energy Corp (NYSE:DUK) has a solid relationship with most of its regulators, regulated markets now account for about 90% of its business, and building plans should lead to rate increases. That, in turn, will support long-term growth and dividend increases.
The shares currently yield around 4.4%. If that jumps into the 5.5% to 6.5% range, investors should happily jump aboard. News, however, might be a big factor in day-to-day share prices moves as the Progress integration continues.
Boring, but reliable
Utilities are pretty boring companies, but that’s exactly why they are considered perfect widow and orphan stocks. The Southern Company (NYSE:SO) and El Paso Electric Company (NYSE:EE) both operate in growing markets, which gives them a head start over the competition. Duke, meanwhile, has taken on an important merger that has helped to reshape its business. All three are worth a look if the utility sell off continues.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Southern Company.
The article Look for Buys Now That Utilities Are on the Outs originally appeared on Fool.com.
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