Utility Expert Eyes Avangrid

Roger Conrad Founder and Chief Editor, Capitalist Times

A little over a year ago, Iberdrola (Madrid: IBE) combined its US generation assets with UIL Holdings to form Avangrid (AGR), notes utility sector expert Roger Conrad, editor of Conrad's Utility Investor.

But Avangrid adopted conservative financial policies that may have turned off some equity investors. Despite guidance for 8 to 10 percent compound annual growth in net income through 2020, the company won’t increase its dividend until the payout ratio declines to at least 60 to 70 percent.

This policy implies that Avangrid could resume regular dividend growth by 2018, at the latest. Fortunately, the company’s guidance for $2.10 to $2.20 in earnings per share for this year suggests that the plan remains on track.

At the end of the day, Avangrid’s prospects hinge on the decisions made by Iberdrola, which owns an 81.6 percent equity interest in the power company.

The Spain-based company appears to have big plans for its US operations, including the construction of 1,449 megawatts of renewable-energy capacity by 2019.

Avangrid also aims to grow its regulated rate base from $8.2 billion to more than $11 billion over this period. This target contemplates investment in its existing systems as well as acquisitions. With a debt-to-capital ratio of 24.5 percent, the company could take on additional leverage.

And despite ongoing investment in additional renewable-energy capacity, Avangrid’s operating cash flow exceeded its capital expenditures by a 1.17-to-1 margin over the first nine months of 2016.

These debt metrics and an investment-grade credit rating mean that the company can continue to reduce its interest expense by refinancing.

In November, Avangrid issued 10-year paper at a coupon rate of 3.25 percent to pay off maturing paper that yielded 5.65 percent. And the firm’s June 2045 bond yielding 4.26 percent to maturity — 2 percentage points less than the average coupon rate on its paper maturing in 2017.

Avangrid’s stock peaked at $46 per share on July 1, 2016, and then declined steadily to a low of $35 and change before rebounding into the upper $30s.

This action is typical for stocks that offer above-average yields with little prospect of dividend growth—and that’s why Avangrid trades at a discount to its peers. Resuming regular dividend growth would close that gap in a hurry.

Two additional upside catalysts could send the stock higher before then: a well-considered acquisition or the market’s realization that the incoming Trump administration’s policies won’t stop the adoption of renewable energy. Avangrid rates a buy up to $42 per share.

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