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Moroney: Energy's Best
01/30/2004 12:00 am EST
"Utility investing used to be much simpler than it is now: just buy stocks with high yields and hold," says Richard Moroney, editor of Dow Theory Forecasts."Now, companies have taken different paths to respond to industry regulation." Here are his best bets in various sectors.
Best Safety Play
"Few utilities offer the safety and consistency of Energen (EGN NYSE). The company’s businesses include natural gas distribution in Alabama as well as exploration and production of natural gas and oil. Its strong balance sheet allows it to purchase reserves and hedge oil and gas production at attractive prices. Looking out five years, Energen targets 7% to 8% annual profit growth, keyed by acquisitions and robust production gains. Per-share dividends have increased for 21 consecutive years. The stock is long-term buy for superior growth potential.
Best Income Play
"KeySpan (KSE NYSE) has averaged a dividend yield of 5.5% over the last five years. The payout has remained fixed since 1999 and is currently well covered by estimated earnings . With 2.5 million customers, KeySpan is the largest natural-gas distributor in the Northeast US. KeySpan also owns a 56% interest in Houston Exploration. Given the company’s improving balance sheet and demonstrated commitment to a high-dividend payout, KeySpan represents a strong choice for income and offers modest capital-gains potential.
Best Natural Gas Play
"Natural gas production volume is increasing at Equitable Resources (EQT NYSE), while gas prices remain high. The company produces gas in the Appalachian region. In the past, the company emphasized stock buybacks over dividends. But in the wake of legislation that cut taxes in dividends, Equitable now plans to spend more on dividends. Strong earnings growth, coupled with a strong balance sheet, suggests EQT has the financial wherewithal to keep raising its dividend. The stock is reasonably valued relative to its total-return potential.
Best Dividend Growth Play
"Questar (STR NYSE) is a total-return play. Consensus estimates project 9% annualized profit growth over the next five years. That earnings-growth rate, coupled with likely dividend growth of 4% to 6%, should lead to above-average returns. Questar’s regulated gas utility and pipeline generate nearly half of its income. Exploration and production activities, mostly in the Rocky Mountains, provide the rest. Questar, with its strong balance sheet and superior profit and dividend growth potential, is a long-term buy."
Meanwhile, Dow Theory Forecast 's latest "Analyst's Choice" is also from the energy field. "As the world’s largest publicly traded oil company, Exxon Mobil (XOM NYSE) reaps the benefits of its size to the fullest, wringing efficiencies from operations to deliver consistent profits. Its refining capacity—more than six million barrels a day—is about 50% greater than its nearest competitor. Geographically diverse to reduce political and economic risk, the company has customers in more than 200 countries. The company has more than 100 long-term oil and gas projects in development. It has a rock-solid balance sheet and strong cash flow. The stock, trading at a modest valuation premium to peers, is a long-term buy."
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