Great Plains: A Top Choice for Utility Investors

02/20/2017 9:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

For investors seeking utility exposure we offer the Top 15 Utilities portfolio, which contains a diversified mix of utilities, explains Richard Moroney, editor of Dow Theory Forecasts.

The Top 15 Utilities portfolio is designed to pay a yield comparable to that of the average utility, with substantially higher capital-gains potential. Over the last decade, we’ve more than achieved that goal.

Great Plains Energy (GXP), an electric utility based in Missouri, has joined our Top 15 Utilities portfolio. The company offers solid operating momentum.

The utility has seen profit margins and revenue both climbing in each of the past four quarters. Great Plains has also raised its dividend in each of the past six years, including a 5% hike announced in November.

At 15 times trailing earnings, Great Plains is one of only two S&P 1500 electric utilities to trade more than 10% below its own five-year median and its peer-group median.

The stock’s low valuation may partly reflect concerns about a pending takeover. In May, Great Plains agreed to acquire Westar Energy (WR), the largest electric utility in Kansas, in a mostly cash deal valued at $8.6 billion. Great Plains will also assume Westar’s $3.6 billion of debt.

Some doubt whether the deal will go through, but the combined company would supply electricity to more than 1.5 million customers in Kansas and Missouri. Following the deal, management expects per-share profits to grow at annual rate of 6% to 8% through 2020.

While we like the deal for its profit-growth potential, it wouldn’t surprise us to see the shares bounce if the merger falls through — which suggests possible upside for shareholders either way.

Great Plains will likely offer an update on the deal, expected to close this spring, when it announces December-quarter results on Feb. 24. Wall Street analysts expect per-share profits of $0.11, down 27%, on revenue of $580 million, up 3%.

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