Two Stocks for Income and Growth

05/20/2010 1:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of Utility Forecaster, says an American nuclear utility and a European-based telecom are in the sweet spot for dividend growth.

The market is in a bond-buying frenzy. And corporations and municipalities have been issuing debt in record amounts to complement the mountain being floated by Uncle Sam.

Bond yields are scarcely attractive. Equity dividends are far safer and more likely to grow than they were a year ago. And they’re at record highs relative to bond yields as well. Entergy (NYSE: ETR) and Telefonica (NYSE: TEF) should produce close to 10% annual growth the rest of the decade.

Two years ago, ETR broke out to more than $120 per share. The catalyst was an innovative plan to spin out six Northeast and Midwest nuclear power plants. Steady profits from these nukes helped Entergy recover from the ravages of 2005 hurricanes Katrina and Rita, and they continue to run well.

However, the nation’s second-largest nuclear power producer cancelled the spinoff, [raising] questions about whether the ute’s value has been impaired.

Canceling the spinoff will shave 40 to 45 cents per share from Entergy’s bottom line this year, or 15 to 20 cents more than prior projections. However, operational earnings guidance of $6.40 to $7.20 remains intact.

The regulated business is enjoying resurgent industrial sales, while lower wholesale prices for unregulated nuclear output were anticipated. Management says it has $5 billion available for dividend increases—such as last month’s 11% boost—and share repurchases, if attractive growth opportunities don’t appear.

Even failure to relicense the Vermont Yankee and Indian Point nuclear plants wouldn’t be calamitous—the company paid pennies on the dollar for both.

It may be a while before Entergy hits $120 again. But the company is more valuable now than two years ago, when its home city of New Orleans was flat on its back. Buy Entergy up to $85 for long-term growth and income. (It closed below $77 Wednesday—Editor.)

Communications is a game of building scale while maintaining financial strength and patience. Few have played better than Telefonica over the two decades-plus since it was privatized by Spain.

Spain remains its biggest market. The company has faced steady losses of local phone connections but maintained margins during the recession, which hit the Iberian Peninsula particularly hard.

Latin America is Telefonica’s main growth market, with expectations for 50 million new clients over the next three years. The company continues to demonstrate its skill going toe-to-toe with Carlos Slim’s America Movil (NYSE: AMX).

Roughly a quarter of Telefonica’s profit is earned elsewhere in Europe, where the company made a series of acquisitions in the last decade. Opportunities here will be in cost cutting as long as the continent remains in economic doldrums.

Telefonica boosted its twice-annual 6.4% dividend by 20% in 2009. And planned increases for the next few years will take the rate near 10%, based on the current share price.

The stock has yet to recover from its decline in the wake of Venezuela’s currency devaluation. That makes now a great time to buy Telefonica below $80. (It closed below $58 Wednesday—Editor.)

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