When was the last time you heard anyone other than Jim Cramer of CNBC's Mad Money get excited about utilities? How about never. When financial advisors start talking about utilities their clients usually start to fidget and yawn. Utilities sounds so ... utilitarian. So common. So boring. Or so it seemed.
You may not be aware of it but as an investment sector, utilities are hopping. Once the investment of choice for widows and orphans, utilities are now in demand according to Smart Money magazine. Their dividends are suddenly attractive at a time when investors are searching for steady income while other investors are getting into utilities because of their growing profits.
Jamie Cox, a managing partner at Harris Financial says it's because the ever-increasing need for electricity in emerging countries and the demand at home to update a dilapidated power grid. He says they both promise to provide a jolt to the prospects of several under-the-radar utilities which he says has become "more of a growth sector than people think.
This sentiment is shared by Michael Nickolini, an investment-product specialist at MFS Utilities fund. He says the growth in utilities is being powered by a building boom. Some higher-potential utilities are upgrading their power plants, building out transmission lines or expanding into renewable-energy markets such as solar " all of which can help boost future profits and dividends. He adds that some firms, like Wisconsin Energy, expect their profits to rise at double-digit rates this year.
However, veteran fund managers are learning to spread the risk should state regulators, who have a say in how much utilities can charge customers, put a dent in earnings prospects and dividend growth. They are holding a couple of the regulated utilities for their consistent income while adding several other utility firms that have much stronger growth prospects. To round out their portfolios, many are adding foreign utilities, such as Brazil- or India-based firms that are seeing big jumps in profits or European firms whose shares appear cheap at recent prices.
If you'd like to dive into the utility investment pool, here are some stocks worth considering according to Smart Money.
1. Wisconsin Energy has a dividend yield of barely 3%, but it also has one of the rare double-digit profit-growth stories in the utility sector. Analysts expect Wisconsin Energy's profits to rise 19% in 2010 and another 10% next year. They say the firm is about to start reaping the benefits of investing several hundred million dollars to make its plants more productive and environmentally friendly. It's also pouring money into renewable energy, including by building the state's largest wind farm. Ron Silvestri of Neuberger Berman says Wisconsin Energy is "one of the best-managed utilities and "one of the best growth opportunities he seen in his 18-year career.
2. CMS Energy, ten years ago, had its operations sprawled from power-generation facilities in Morocco and water-desalination plants in the Middle East to pipelines in Australia and through South America, which left it laden with debt. But lately, CMS Energy has opted to stay closer to home, focusing on its regulated gas and electricity business servicing mostly Michigan and slashing its debt. CMS Energy is an "attractive story, says ClearBridge Advisors utilities analyst Tatiana Thibodeau. She calls it a firm with above-average profit-growth prospects. CMS boasts a dividend that has become significantly juicier in the past year, with two increases, including a 40% jump this year.
3. Sempra Energy is what's known as an integrated utility. It gets more than half of its profits from its regulated utility and the rest from gas pipelines and storage terminals. Regulated utilities are those that generate and transmit power, then collect the bill from customers. San Diego-based Sempra Energy has benefited from California's supportive policies toward upgrading infrastructure and renewable-energy investments. Sempra is building a transmission system to bring wind and solar energy to San Diego. Trading at 14 times next year's estimated profits, Sempra is not getting much credit from the market for the bulk of its regulated business.
4. Companhia Energtica de Minas Gerais or Cemig is a utility in Brazil where demand for electricity is growing twice as fast as it is in the U.S. Cemig stands to benefit from a need to spend billions to upgrade Brazil's power grid to satisfy the demands of the country's emerging middle class and to prepare for the upcoming World Cup and Olympics. Analysts expect Cemig's profits to grow in the low double-digits each year for the next few years.
5. NextEra Energy has had a good relationship with Florida state regulators. But the relationship soured earlier this year when the Florida Public Service Commission denied a rate-hike request by the company's regulated utility business. As a result, the company tabled billions of dollars in capital projects, and the stock slid. But late this summer the company hashed out a partial agreement with the state to recoup some of its costs, and analysts are encouraged by the appointment of some new commissioners and the prospect of more such changes next year. Analysts say the regulatory uncertainty hangs over the stock. Trading at 12 times next year's expected earnings, the Florida-based utility's shares are among the cheapest in the sector, even as the company possesses "some of the best growth in the system, according to John Maloney, head of wealth-management firm M&R Capital. Much of that growth is coming from NextEra's renewable business. The company is one of the largest generators of wind and solar in North America. With less than 5% of its energy coming from oil, NextEra bills itself as a clean-energy utility. Analysts say the company's business mix positions it well if there is a bigger push toward clean energy by Congress or regulators. Analysts expect profits to rise about 3% in 2011, to $1.9 billion, and they expect the company to generate 5% to 7% profit growth in coming years. The company pays out just 40% of its earnings as dividends.
