8% Yield with Long-Term Potential

01/05/2011 1:15 pm EST

Focus: GLOBAL

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Electricity and gas marketer Just Energy offers an 8% annual yield from dividends set to grow over time, writes Tom Slee in The Income Investor.

Just Energy (Toronto: JE, OTC: JUSTF) has generated double-digit growth in every year since inception and now has over 3 million customers in Canada and the United States.

Established in 1997 and based in Toronto, the company is engaged in selling natural gas and electricity to small businesses and residential customers under long-term contracts. In June 2009, the company acquired National Home Services and gained entry into the water heater and furnace rental business.

Just Energy provides an increasingly popular option that allows customers to opt for "green power", energy provided from renewable sources. The company's philosophy is not to offer deep discounts but rather to protect customers from unpleasant price hikes. In addition, JE owns a 67% stake in TCF, a 150 million liter ethanol plant in Saskatchewan.

Just Energy is engaged in a stable, well-diversified business with revenues secured by long-term contracts. The rate of US property foreclosures has declined 19% year-over-year, and this trend will improve the trust's default experience. Just Energy is one of the few "survivor trusts" expected to not only maintain but to actually increase its present distribution. That makes Just Energy a growth situation with potential for capital appreciation.

The trust (JE converted to a corporation this week) reported a cash flow of $0.33 a unit during the three months ended Sept. 30, compared with $0.31 a year ago. (All figures in this article are in Canadian dollars.) As a result, Just Energy is expected to generate a cash flow per unit of about $1.50 a share in fiscal 2011 (March 31 year-end) and $1.75 in 2012, which would create a 71% payout ratio based on the present distribution. Market capitalization is approximately $2 billion and revenues in fiscal 2010 amounted to $2.3 billion, resulting in net income of $232 million.

In May, Just Energy acquired Hudson Energy, a distributor of energy to businesses in New York, Illinois, and Texas, for $330 million.

As with all consumer-related, quasi-energy utilities, Just Energy's results are affected by cool summers and warm winters that reduce demand for gas and electricity. However, this should even out over time. A sharp jump in US mortgage foreclosures could increase the trust's default experience.

The company currently pays $0.103 per unit each month for an annual total of $1.24 and a current yield of 8.2%. Just Energy intends to maintain this rate as a corporation.

Just Energy is suitable for investors seeking above average income plus some growth. It runs a solid, expanding, and geographically diversified business that should support a growing dividend. There is potential for some capital gains. Keep in mind, though, that this is still a small-cap stock and suitable only for investors who are able and willing to assume some risk.

[For another high-yielder from Canada’s energy patch, see Roger Conrad’s recent profile of Daylight Energy—Editor.]

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