CMS Energy: In the Bargain Bin

06/15/2015 8:00 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

In early 2003, this featured utility stock teetered on the brink of bankruptcy. Management pulled the utility from the edge by reducing operating risk, slashing debt, and working hard to improve relations with state regulators, explains Roger Conrad, editor of Conrad's Utility Investor.

Twelve years later, Michigan-based CMS Energy Corp. (CMS) has generated a total return of more than 1,200%.

And there's more upside to come, thanks to the company's reliable earnings growth of 5% to 7% and a rock-solid yield of about 3.7%.

It's a great time to buy CMS Energy now that investors' aversion to lower-yielding utility stocks has landed the shares in the bargain bin.

Over the next ten years, CMS Energy plans $15.5 billion worth of capital expenditures, 45% more than the firm invested over the previous decade.

Management also indicated that the utility's opportunity set could increase this spending plan to more than $20 billion, accelerating earnings growth.

This laundry list of relatively small projects aims to reduce fuel, operating, and maintenance costs while improving system reliability and compliance with environmental rules and regulations.

Management has allocated about $6 billion to incremental expansions to CMS Energy's gas distribution and pipeline system, an investment that will improve safety, accommodate additional customers, and enable the firm to replace coal-burning power plants with ones that run on natural gas.

Other endeavors include renewable-energy development, grid modernization, and a system-wide effort to reduce waste by 15%.

CMS Energy's strategy of pursuing a profusion of smaller opportunities means that regulators won't have any big, controversial projects to shoot down. And the cost savings from these efforts help to mitigate the size of potential rate increases.

Gov. Rick Snyder's reelection last November should help to ensure continued support for CMS Energy at the state level. And the utility could enjoy an earnings bump if the legislature eliminates Michigan's 10% retail access requirement later this year.

CMS Energy's shares have pulled back 7% amid concerns that a hike in the benchmark interest rate will erode the value of in future dividends, never mind that the utility has the scope to grow its cash flow and payout at a steady clip.

Don't miss out on this opportunity to buy CMS Energy—the latest addition to our Conservative Income Portfolio—up to $33 per share.

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