Dividend Watch: Making American Utilities Pay For Your Retirement (AEP, DUK, PGN, FE, XLU)

It would be easy to worry about the share prices of utility companies after the recession and after the most recent rise in commodity prices, and that brings up the great dividend worry.  Utilities have traditionally one of the highest dividend payouts of all sectors due to their defensive nature and generally a steady income stream regardless of the business cycles.  That leads us to American Electric Power Co., Inc. (NYSE: AEP), Duke Energy Corporation (NYSE: DUK), Progress Energy, Inc. (NYSE: PGN), and FirstEnergy Corporation (NYSE: FE).  For those who want to avoid the individual stock risk, there is the Utilities Select Sector SPDR (NYSE: XLU) ETF.

Our daily “Dividend Watch” does not always look for the highest dividends on an absolute basis, but we look for either the most stable dividends or those which can be raised easily through time and we generally look for the companies large enough with a core market that can stand better through time than smaller peers.  What we like about the electric utilities today is that these offer high income and they are defensive stocks in nature.  Simultaneously, they do offer some growth, yet also offer value investors plenty of value. Another worry might be the build-out of the power grid that has continually been an argument, but that and the commodity worry must be a combined non-starter… Many utility shares are hitting 52-week highs.

American Electric Power Co., Inc. (NYSE: AEP) trades around $37.00 and its 52-week trading range is $28.26 to $37.94.  It has a market cap of almost $18 billion and pays investors right at 5.0% in dividend yields.  We would warn against expecting another immediate dividend hike as it raised its $0.41 dividend that had been static from November-2007 to February-2010, but then it raised it to $0.42 for two quarters and then to $0.46 for the last two.  AEP has been diversifying its portfolio of electric power sources with more renewables to its 5+ million customers in 11 states.  The current annualized payout of $1.84 compares to Thomson Reuters estimates of $3.13 EPS for 2011 and $3.24 EPS for 2012.  Based upon this, we’d expect that dividend raise to go to $0.47 or $0.48 per quarter at the next dividend hike.  Analysts have a consensus price target objective here of $38.75, although we would expect some to lift targets if that is achieved.

Duke Energy Corporation (NYSE: DUK) is one which many investors had looked the other way on after its 2007 spin-off of Spectra.  What is interesting is that it raised its dividend through the recession and its $0.245 payout may be up for being raised again soon. Shares just hit a new 52-week high of $19.00 today and it has a market cap of about $25 billion.  It also pays investors close to a 5.2% yield.  The company just reported a 15% rise in net income and it is in the midst of the merger with Progress Energy, Inc. (NYSE: PGN).  This deal is going to transform Duke, but Progress also has a yield of close to 5.2%.  The company claims to only be spending $90 million for the first integration, which means that a profit boost may be able to flow immediately to the bottom line.

FirstEnergy Corporation (NYSE: FE) is in the news this morning because of a blowout earnings report, or at least on guidance.  Shares are up 5% at $41.65 but the stock hit a new 52-week high of $41.77 against a low of $33.57.  It also has a market cap of about $12.7 billion and it pays investors about 5.3% in dividend yields even at the highs today.  What makes First Energy so interesting is that it is only about half of its pre-recession share price peak and its $0.55 per quarter dividend has been static since early 2008.  The company earned only $0.15 for the quarter, but that would have been $0.69 EPS had it not been for the shares issued for the acquisition of Allegheny and due to higher operation and maintenance costs.  This $2.20 payout compares to raised guidance of adjusted earnings per share of $3.20 to $3.50 for 2011 through 2013. We are not looking for a big dividend increase immediately, but 5.3% should entice investors looking for ‘coupon income’ in stocks.

For those who want to smooth out the noise of individual companies and still get a handsome dividend, there is always the Utilities Select Sector SPDR (NYSE: XLU).  We evaluate this because the rise in commodities would be punishing it if there was going to be a blow-up in the utility sector’s earnings.  Shares are at $33.52 and it hit a new 52-week high of $33.56 today.  As this is a fund (ETF), it has a variable quarterly payout but the average of the payouts comes to a yield of roughly 4.0% for investors.

If you want to know just how committed utilities are to dividends, American Electric Power and Duke are in a consortium called Defend My Dividend, which aims to lobby Congress not to boost the dividend tax all over again as it did in the past.

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JON C. OGG