Power Up Your Portfolio

10/28/2008 12:01 am EST


Nick Lanyi

Editor, High-Yield International

Nick Lanyi, editor of High-Yield International, is cautiously buying big utilities with high dividends.

Just a month ago, shares of Huaneng Power (NYSE: HNP), China’s largest publicly traded electric utility, sold above $34 per share. Now they’re under $18, for a yield of 8.8%, although expectations for China’s long-term electricity needs really haven’t changed. As the country continues the massive infrastructure build-out that could last for decades, Huaneng Power is near-certain to grow for years to come.

A serious global recession would slow that expansion in the short run, but economists still think China’s gross domestic product (GDP) will grow 9.8% for all of 2008 and 8.5% in 2009. And during the first three quarters of 2008, while economies around the world were weakening, Huaneng Power’s electricity production rose 12.8%. I think Huaneng’s cash flows will remain strong and its dividend is dependable.

A member of the world’s 20 largest utility companies, UK-based utility National Grid (NYSE: NGG) operates regulated electric and natural gas utilities in the UK and the US. Electricity accounts for about three-quarters of its revenue, with gas making up most of the rest.

National Grid is the dominant electricity provider in the UK and one of the nation’s largest gas companies. The company is still integrating its 2007 acquisition of US-based KeySpan, which will help its operating margins improve in the coming quarters. The company, which has a well-regarded management team, has solid operating cash flow growth, and moderate debt, so it has been able to fund share buybacks and healthy dividend increases.

At current prices,of 17.53 Monday, the shares yield a stable 8.8%. Although economic weakness is a risk, I think the current share price—at a nearly three-year low—more than discounts a very bad scenario.

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