Two Cheap High-Yielding Gems

03/15/2010 12:00 pm EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, editor of Utility Forecaster, says a giant telecom and an electric utility pay solid dividends and offer good growth potential at a very attractive price.

On the operations front, it’s all coming up roses for AT&T (NYSE: T) this year.

The company reported a 24.4% boost in fourth-quarter 2009 earnings, with its extremely profitable alliance with Apple (Nasdaq: AAPL) activating 3.1 million iPhones. And its exclusive deal was extended to the iPad tablet computer, generating an additional $100 million in annual earnings, according to Piper Jaffray.

The company will spend $18-$19 billion on its networks for 2010, 10% above last year’s massive level. Meanwhile, it’s now paying a bumped-up quarterly dividend of 42 cents a share.

[But] as a stock, AT&T gets less respect than ever. Good news has been routinely dismissed by investors, with even the iPad announcement generating little buying interest. The stock is down 10% thus far in 2010. The yield of 6.6% is near an all-time high, while AT&T’s price-to-book value of 1.48x is scraping a low.

In the long run, the market is always right, but it can be extremely shortsighted in the near term. AT&T could falter, as critics forecast. But there’s absolutely no sign of weakness now, and expectations are rock bottom.

All the company has to do is to keep performing as a business. Meanwhile, the dividend is a real incentive to stick around. AT&T is a Buy up to $30. (It closed Friday below $26—Editor.)

No hole has proven too deep for regulated utilities to climb out of—provided they cut operating risk and debt and repair relations with regulators.

That’s what NiSource (NYSE: NI) has done since falling from grace during the 2001-2002 bear market.

Ten years ago, the company acquired a network of gas distribution, pipeline/storage, and electric power assets stretching from Indiana to Massachusetts. [But that] left it with a mountain of debt when the energy market collapsed, taking down its share price, credit ratings, and dividend.

That’s when management went to work cutting leverage, operating costs, and risk. The result: Despite a big hit to industrial demand (50% of electric sales) during the recession, earnings, credit ratings, and dividends held steady. The company also refinanced its debt at good rates and is executing on $900 million of new revenue-generating projects this year, with a particular focus on pipelines and storage for the prolific shale energy reserves in Appalachia.

NiSource still faces challenges from slow industrial demand for electricity (33% of earnings) in Indiana, where it also has a major rate case to be decided this spring. Also, pension requirements shaved four cents off fourth-quarter net.

Management’s targeted earnings range of $1.10 to $1.20 per share in 2010—and 3% to 5% growth thereafter—is based on conservative assumptions for the economy and regulation.

Meanwhile, a [possible] takeover or spinout of pipeline assets provides windfall gains potential. That adds up to more solid returns on top of last year’s 51.5%. Buy NiSource up to $16. (It closed at around $15.50 Friday, yielding 5.9%—Editor.)

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