Utilities That Are Going Green

05/06/2008 12:00 am EST

Focus: STOCKS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Richard Band’s Profitable Investing, finds two utilities that pay healthy dividends even as they become more environmentally friendly. 

Folks have talked for decades about the virtues of clean, renewable energy. But until the past few years, when the price of fossil fuels skyrocketed, a lot of “green” energy schemes simply didn’t produce the sort of green you and I are interested in: profits.

That’s changing, I’m pleased to say. With crude oil now well over $100 a barrel (up from less than $30 five years ago), [some] renewable energy sources are becoming economical—and even lucrative.

Green energy offers a wide spectrum of risk and reward. For conservative investors, I prefer outfits that act as toll takers. Renewable energy is fine, but I like renewable, repeatable revenues even better!

Solar, biomass, and (especially) wind are coming to the fore. Oilman T. Boone Pickens is investing enthusiastically in wind because, he says, it lets him escape the declining production curve of his petroleum fields. My top wind-power stock is FPL Group (NYSE: FPL), parent of Florida Power & Light. FPL operates America’s largest network of wind farms, with a capacity of 8,500 megawatts—almost half the company’s total generating capacity.

FPL also owns a sizable fleet (2,566 MW) of nuclear plants. While there are legitimate concerns about disposal of nuclear waste, nukes emit essentially zero greenhouse gases into the atmosphere. What’s more, the cost of nuclear power is now considerably less than that of electricity generated by oil or natural gas. This cost advantage is enabling FPL to steal wholesale (generating) business from utilities that depend on fossil fuel.

Another promising “green” utility pick is Pacific Gas & Electric (NYSE: PCG). In early April, the company inked contracts to buy up to 900 megawatts of solar thermal power from plants to be built in the next few years—enough electricity to power 630,000 California homes.

But that’s only a small sliver of PG&E’s renewables effort. This year, [it] will derive 14% of its power from evergreen sources—solar, wind, biomass, geothermal, and small hydroelectric—on the way to meeting a state-mandated 20% emissions reduction by 2010.

PG&E has made a dramatic financial recovery from the crisis-wracked days of the 2001 California electricity shortage. The company has boosted its dividend 30% in less than three years, and now boasts one of the industry’s stronger balance sheets.

Ironically, the only real drawback to these utilities is that Wall Street has begun to catch on to the value of their renewables business. FPL stock, in particular, has refused to pull back more than a token amount from its 52-week high (set in January). PCG has given up somewhat more ground. I’m also drawn to PCG’s 3.9% dividend yield, which easily exceeds FPL’s 2.6% payout.

Let’s add PCG to the model portfolio at $41 or less. FPL rates a buy on a pullback to $63 or less. (PCG closed below $41 Monday, while FPL finished above $67—Editor.)

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