Investors in search of income should consider owning names in the utility space. These companies operate in near monopolies in the areas that they service. This can provide regular and predictable revenue and earnings, which allows for the reliable distribution of dividends.
Many names in the utility sector provide solid yields and have raised dividends for long periods of time. In this article, we will examine two names that provide high dividend yields and are not too overvalued according to the GuruFocus Value chart.
American Electric Power
American Electric Power (AEP, Financial) counts 10 utilities amongst its portfolio, delivering electricity to 5.5 million customers in 11 U.S. states including Michigan, Ohio, Texas and Virginia. The company has a variety of power sources, including coal, natural gas, nuclear and renewables. American Electric Power is valued at $43 billion and generated revenue of $15 billion last year.
American Electric Power raised its dividend almost 6% for the Sept. 10, 2020 payment date, extending the company’s growth streak to 16 years. The dividend has a compound annual growth rate (CAGR) of 4.4% since 2011, so the most recent raise was above its long-term average.
The annualized dividend of $2.96 equates to a yield of 3.5% at current share prices. This is nearly three times the average yield of the S&P 500 index. Shareholders of American Electric Power are accustomed to the stock paying a high yield as the average yield hasn’t dipped below 3.1% since at least 2005, with the 10-year average yield coming in at 3.8%.
American Electric Power is expected to earn $4.67 per share in 2021 according to Wall Street analysts surveyed by Yahoo Finance, resulting in a projected payout ratio of 63% for the year. Excluding 2016 because the payout ratio was artificially high following a severe decline in earnings per share, American Electric Power has an average payout ratio of 61% over the last decade.
American Electric Power closed Thursday’s trading session at $85.44. Using analysts’ estimates for 2021, the stock has a forward price-earnings ratio of 18.3. This is a premium to the stock’s average multiple of 16.5 times earnings since 2011, but not extravagantly so.
Shares look appropriately priced according to the GuruFocus Value chart:
American Electric Power has a GF Value of $85.38, which equates to a price-to-GF-Value ratio of 1.00.
American Electric Power has been a rather consistent dividend grower over the years, with the most recent raise higher than the average that shareholders have received over the last decade. The stock’s yield is slightly lower than normal and the price-earnings ratio is just above the long-term average. That said, the dividend payout ratio appears healthy and the yield is much better than what the market index is offering, making American Electric Power a solid addition to the income portion of an investor’s portfolio.
WEC Energy Group
WEC Energy Group, Inc. (WEC, Financial) is a holding company for utilities that provide gas service in Illinois, Michigan and Minnesota and electric, gas and steam service in Wisconsin. In total, the company provides gas service to 2.9 million customers and electricity to 1.6 million customers. WEC Energy Group also has a sizeable renewable business as well. The company has a market capitalization of $29 billion and had revenue in excess of $7 billion last year.
Following a 7.1% increase for the March1, 2021 payment, WEC Energy Group has now raised its dividend for the past 17 years. This was slightly lower than the dividend’s CAGR of 9.3% over the last decade, but still solid.
The annualized dividend amounts to $2.71, giving the stock a yield of 2.9%. This is below the long-term average yield of 3.2%, but still more than twice what the S&P 500 is providing.
Analysts believe that WEC Energy Group will earn $4.02 per share this year, implying a projected payout ratio of 67%. Though this is slightly higher than the 10-year average payout ratio of 62%, it is very much in-line with the five-year payout average payout ratio of 66%. WEC Energy Group has produced a very consistent dividend payout ratio over the past five years.
Shares ended yesterday’s trading session at $92.21. WEC Energy Group has a forward price-earnings ratio of 22.9. Since 2011, shares have an average price-earnings ratio of 19.4, so the forward valuation is rich, but much more in-line with the five-year multiple of 21.6 times earnings.
WEC Energy Group also appears to be fairly valued using the GuruFocus Value chart:
Using the current GF Value of $92.14 and the most recent closing price, WEC Energy Group has a price-to-GF-Value ratio of 1.00.
WEC Energy Group isn’t the high-yielder that some other utility names might be, but the company is more growth-oriented than many of its peers because of its renewable energy business. This is reflected in the stock’s valuation over both the long- and medium-term. The dividend also has a high single-digit growth rate over the last 10 years, which should be appealing to those looking for higher income growth. Shares of WEC Energy Group are trading with a premium to the historical multiples, but look decently priced using intrinsic value.
Final thoughts
Utilities remain a favorite of dividend growth investors because of their ability to throw off income. While their yields are lower than usual, both American Electric Power and WEC Energy Group have a yield of more than 2%. Both names have raised dividends for at least 16 years and have manageable payout ratios, especially for utility companies. Neither stock appears to be overvalued compared to their respective GF Values, which should be attractive to investors finding it difficult to locate value in today’s market. For investors looking to add stable sources of income, American Electric Power and WEC Energy Group could be solid investments, in my view.
