Utilities with High Productivity
09/14/2016 9:00 am EST
While trying to identify high-performing utilities, we prefer to focus on the data we can see now, rather than play a guessing game about which investments will turn out to be the most profitable in the future, notes Richard Stavros, editor of Investing Daily's Utility Forecaster.
In our experience, companies that have already demonstrated success in achieving high productivity are more likely to continue doing so,
In our analysis, profit per employee was our top productivity metric. On that score, our portfolio holdings that ranked the highest were Eversource Energy (ES), Duke Energy Corp. (DUK) and Alliant Energy Corp. (LNT).
In our initial ranking, we also wanted to make sure that growth in net income per employee was not a sudden development, but a product of sustained growth.
That’s why we looked at three-year compound growth numbers going back as far as 16 quarters to establish that each utility has been generating consistent growth.
We have long believed those utilities that are investing in their wires will ultimately offer superior value compared to their peers. Happily, Eversource is one of those companies.
With regulatory momentum spurring increased adoption of renewables, all those new dispersed sources of generation will need connections to the grid. That’s one of the reasons why wires are such valuable infrastructure.
We believe the firm’s investments in its wires business will ultimately be a driver of long-term value for investors, especially given Eversource’s top productivity metrics.
Duke has been diligently shifting its business mix toward fully regulated operations through strategic acquisitions and divestitures.
The utility giant’s pending acquisition of gas utility Piedmont Natural Gas (PNY) will give it a fully regulated utility with a growing earnings stream.
The company reiterated guidance for the full year that is in line with analyst expectations and would represent growth of 1% for the full year.
Alliant, which we’ve frequently highlighted for its excellent financial stewardship, is in the midst of expanding its infrastructure.
Management forecasts earnings growth of 5% to 7% annually, which will flow through to the dividend, for which they’ve targeted a 60% to 70% payout ratio.
Alliant recently announced plans to expand its Whispering Willow Wind Farm by 500 megawatts, a $1 billion project that could be in operation by 2019.
Meanwhile, these utilities not only grew profits per employee, but also showed leadership in return on invested capital, return on capital employed and equity reinvestment, all key metrics for gauging a utility’s investment acumen.
By Richard Stavros, Editor of Investing Daily's Utility Forecaster