Coal Sinks TECO; Look for a Dividend Growth Elsewhere

05/21/2014 5:40 pm EST

Focus: ENERGY

Jim Jubak

Founder and Editor, JubakPicks.com

As of late, this utility stock has severely lagged the rest of the sector, therefore MoneyShow's Jim Jubak has collected his dividend, and now he's decided it's time to sell.

Now that I've collected my dividend on TECO Energy (TE). I'm going to sell the shares out of my Dividend Income Portfolio. The stock went ex-dividend on May 9.

This has been a good market for most utility stocks with the Dow Jones Utility Average up 9.82% in 2014 through May 21. But TECO Energy has badly lagged the sector with a 1.74% gain for 2014 through May 21. The stock's 5.19% dividend yield partly makes up for that but I am disappointed that the company has not been able to raise its dividend payout for the last two years. And I worry that the payout ratio of 93% for the trailing 12 months—meaning the company is paying out 93% of earnings as dividends to shareholders—which is unsustainably high. A 93% payout ratio is certainly not an indicator of future dividend increases.

The problem for TECO Energy has been the utility's coal unit. Once the source of about 20% of TECO Energy earnings, in the first quarter, thanks to depressed demand that has lowered volumes and prices, TECO Coal reported a loss of $1.6 million versus $3 million in income during the first quarter of 2013. Sales came to 1.3 million tons of coal at an average selling price of $79 a ton. That was down from 1.4 million tons sold at an average of $90 a ton in the first quarter of 2013. TECO has done a good job of wringing cost out of the unit, but the company is at a major disadvantage in that it is producing coal in higher cost Appalachian fields and then facing higher transportation costs to West Coast ports than miners working in Wyoming's Powder River Basin. The average cost of production at TECO Coal was $82 a ton in the first quarter. That was down from $88 per ton on average in 2013 but up from $79 a ton in the fourth quarter.

TECO Energy is undoubtedly shopping its coal unit—I'm just not sure that it will find a buyer at a reasonable price in this market for coal assets.

The shares were up 2% from my August 20, 2013 purchase price as of the close on May 21. Add in that 5.19% dividend and the total return isn't bad. I just think the portfolio can do better and I'd certainly like to find a stock where dividends are headed upward rather than being stagnant (or possibly at risk).

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of TECO Energy as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund's holdings almost totally to cash.

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