Merrill Lynch Raises Price Targets on Top Dividend Paying Utilities

Despite all the investor concern over higher interest rates, the fact of the matter is the yield on the 30-year U.S. Treasury bond is almost exactly the same as it was this time last year, despite the fact that the Federal Reserve has begun the interest rate increases. While the Fed may sit on their hands until June, the perceived threat to bond proxy stocks like utilities is way overblown.

In a new research report, Merrill Lynch resets its earnings estimates and price targets on some of the top companies in the sector. We found three that are rated Buy at Merrill Lynch and make good sense for conservative dividend investors now.

American Electric Power

This large cap sector leader is a good fit for conservative growth and income total return accounts. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. The company ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the country. American Electric also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.

Many on Wall Street feel that the stock trades at a discount to its utility peers and that it deserves a premium. They also think the company will sell generating assets and buy back shares with the proceeds, which will be accretive. Merrill Lynch slightly lowered earnings estimates for this year, but kept 2017 and 2018 estimates in place.

Shareholders are paid a 3.55% dividend. The Merrill Lynch price target was raised to $66 from $62, while the Thomson/First Call consensus target is $64.03. The shares closed Monday at $63.24.

Public Service Enterprise

This is another Buy-rated stock that gets a hike in the price target. Public Service Enterprise Group Inc. (NYSE: PEG) operates as an energy company primarily in the northeastern and mid-Atlantic states. It operates nuclear, coal, gas, oil-fired and renewable generation facilities with a generation capacity of approximately 11,678 megawatts. It sells electricity, natural gas, emissions credits and a series of energy-related products.

The company’s electric transmission and distribution system included 24,022 circuit miles, of which 8,226 circuit miles were underground; and 848,496 poles, of which 549,636 poles were jointly owned, as well as four electric distribution headquarters and five sub-headquarters. Merrill Lynch raised estimates for this year, and slightly lowered them for 2017 and 2018.

Shareholders receive a 3.22% dividend. The Merrill Lynch price target went to $45 from $44, while the consensus target is $42.87. The stock closed Monday at $44.62.

PPL

This utility posted inline fourth-quarter earnings, but came in a little light on the revenue side. PPL Corp. (NYSE: PPL) serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties, as well as 543,000 customers in 77 Kentucky counties and five counties in Virginia. The company also provides electric delivery services to approximately 1.4 million customers in Pennsylvania and operates an electricity distribution network for the Midlands, South West and Wales in the United Kingdom.

In addition, PPL offers a range of customer-care and back-office services to competitive retail energy suppliers, including customer enrollments, contract management, electronic data exchange, simple and complex billing and call center operations, comprising telemarketing, payment processing and collections of overdue accounts.

This is one of the leading utility companies in the United States that plans to continue to increase regulated operations and lower earnings volatility attached to competitive operations. PPL raised cash and lowered debt late last year by selling some hydroelectric assets to NorthWestern energy. The analysts raised earnings estimates for 2016 through 2018.

Investors receive a generous 4.22% dividend. Merrill Lynch has a $39 price target, up from $38, and the consensus target is $37.73. PPL closed Monday at $36.06 per share.
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All three companies make good sense for conservative accounts looking for total return. The Merrill Lynch analysts have done their homework well, and while the upside may not be gigantic, the safety factor is.