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Nathan Parsh
Nathan Parsh
Articles (194) 

3 Utilities Offering High Total Returns

The market is expensive, but there are still opportunities for value investors

December 22, 2020 | About:

The S&P 500 has a trailing price-earnings ratio of more than 42 at the moment. Even using expected earnings per share for the next year results in a forward price-earnings ratio of more than 26. Using trailing or forward EPS shows an expensive market. On top of that, the index's dividend yield of 1.6% is providing little in the way of income.

Finding value that also provides a higher level of income can be difficult in this market, but it's not impossible. In this article, we will look at three utility stocks that are trading as much as 19% below their intrinsic value estimates while yielding at least 3.9%.

Avista Corporation

Avista Corporation (NYSE:AVA) supplies electricity to parts of Alaska, Washington, Idaho, Oregon and Montana and natural gas to portions of Oregon and northern Idaho. In total, the company has 410,000 electricity and 361,000 gas customers. The company generates a large portion of its electricity through hydro, thermal and wind facilities. Avista has a market capitalization of $2.63 billion and generated $1.3 billion of revenue last year.

Avista has increased its dividend for 18 consecutive years. The most recent increase resulted in a 4.5% raise for the distribution made this past March 3. This is identical to the dividend's compound annual growth rate of 4.5% over the past decade.

Using the annualized dividend of $1.62 and Monday's closing price of $38.30, Avista offers a yield of 4.2%. The stock has a 10-year average yield of 3.9%. The stock hasn't averaged a yield of at least 4% for an entire year since 2015.

Analysts surveyed by Yahoo Finance expect that the company will earn $1.85 per share in 2020, which gives the stock a forward price-earnings ratio of 20.7. This is a premium to the stock's average price-earnings ratio of 17.7 since 2010.

While the current earnings multiple is above the historical average, Avista appears to be trading below its intrinsic value as calculated by the GuruFocus Value chart:

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Avista has a GF Value of $43.11. Based on the most recent closing price, the stock trades with a price-to-GF Value ratio of 0.89. This earns the stock a rating of modestly undervalued from GuruFocus. Reaching its GF Value would result in a share price gain of 12.6%. Add in the dividend, which would be 3.8% at the GF Value, and shareholders could see a total return of more than 16% from Avista.

Avista is one of the smaller utility companies in the market, but has an excellent track record of dividend growth. The current yield is attractive, as are the stock's total potential returns. I think investors looking for a smaller utility company could do very well owning Avista at the current price.

Consolidated Edison

Consolidated Edison, Inc. (NYSE:ED) is a holding company for Consolidated Edison Company of New York, Inc., which provides electricity, gas and steam to most of New York City and Westchester County. The company is currently valued at $23.9 billion and had sales of $12.6 billion in 2019.

Consolidated Edison has a long history of dividend growth, having raised its distributions for 46 consecutive years. The company gave shareholders a 3.4% increase for the payment made this past March 15, which was above the dividend's CAGR of 2.2% since 2010.

With an annualized dividend of $3.06 and a recent price of $69.95, Consolidated Edison pays a 4.4% yield today. For context, the stock has an average yield of 4.1% over the last decade. If the stock were to average its current yield for an entire year, it would be the highest since 2014.

Analysts expect that Consolidated Edison will earn $4.23 in 2020, which gives the stock a forward price-earnings ratio of 16.5. This is a slight discount to the stock's 10-year average price-earnings ratio of 16.7.

Shares look even cheaper using Consolidated Edison's GF Value:

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GuruFocus gives Consolidated Edison a GF Value of $82.05. Using the recent closing price, shares have a price-to-GF-Value ratio of 0.85, giving the stock a rating of modestly undervalued. Consolidated Edison's stock price sits 17.3% below its intrinsic value estimate. Add in the dividend and total returns could be 21% if the stock were to reach its GF Value.

Consolidated Edison is a Dividend Aristocrat that is approaching Dividend King status. This is a feat not easily accomplished. In addition to a high yield, Consolidated Edison also offers the potential for sizeable returns. I view Consolidated Edison as a strong buy at the current price.

Portland General Electric

Portland General Electric Company (NYSE:POR) supplies electricity to approximately 900,000 customers in Oregon. The company's area of operations includes Portland and Salem, among 50 other cities in the state. Portland General Electric has a market capitalization of $3.7 billion and produced $2.1 billion of revenue in 2019.

Portland General Electric has raised its dividend for 15 consecutive years. The company raised its dividend 5.8% for the Oct. 10 payment, which compares favorably to CAGR of 3.9% that shareholders have received over the last decade.

Based on the annualized dividend of $1.63 and the most recent closing price of $40.96, Portland General Electric yields just under 4% today. Shares have an average yield of 3.6% over the last 10 years. The stock hasn't averaged a 4%+ yield for an entire year since 2012.

Portland General Electric is expected to earn $1.57 per share this year, giving shares a forward price-earnings ratio of 26.1. Over the last decade, the stock has an average multiple of 16.8 times earnings.

The company's EPS is expected to fall 34% from the previous year. This is due to a large energy-trading loss that occurred during the third quarter for which the utility will not seek recovery of the loss from ratepayers. Analysts appear to believe that this will be a one-time issue as earnings are predicted to surge almost 66% next year.

GuruFocus estimates that Portland General Electric is trading well off of its intrinsic value:

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Portland General Electric has a GF Value of $48.77, which gives the stock a price-to-GF Value ratio of 0.84 using the recent price. GuruFocus rates the stock as modestly undervalued. Portland General Electric's stock could return 19.1% if it reached its GF Value. Factoring in the dividend yield means total returns could be 22.4%.

Portland General Electric will see a weak EPS result this year due to an energy trading loss. The company is expected to recover from this and EPS should be above 2019 levels next year. Portland General Electric has a solid dividend growth track record and pays a yield that hasn't been seen very often since early in the last decade. Investors willing to overlook expected results in 2020 could be well rewarded down the road, as Portland General Electric appears to be an excellent purchase opportunity.

Final thoughts

While the market does look expensive, there are definitely areas where investors can look to find value. Those searching for income don't have to despair with the minuscule yield from the S&P 500 index.

Avista, Consolidated Edison and Portland General Electric all trade at least a low double-digit percentage below their GF Value while providing higher than usual income. Investors looking for both value and income could potentially see excellent total returns from these three utility companies.

Author discloser: the author has no position in any stock mentioned in this article.

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

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