Wisconsin Energy: Quality on Sale

12/25/2015 7:00 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Utility expert Roger Conrad views one of his recommended stocks as a quality buy currently on sale following an acquisition. Here's the latest from Conrad's Utility Investor.

Last June, Wisconsin Energy Corp completed its acquisition of Integrys Energy Group, becoming WEC Energy Group (WEC).

Since then, the company has treated investors to two dividend increases, the latest of which involved a sequential bump of 8.2% that will take effect with the payment slated for March 1, 2016.

All told, WEC Energy has hiked its payout by more than 17.2% since the electric utility acquired the gas distributor. And readers who followed our lead and purchased shares of the former Wisconsin Energy have enjoyed a 26.9% increase in their annual income.

However, the stock itself has rallied only 8.9% since our entry point in early July 2014 and offers its highest dividend yield since Enron imploded in late 2001.

WEC Energy’s shares also trade at their lowest price-to-cash flow ratio since the 2008-09 financial crisis. We now view the stock as "quality on sale."

This discount won’t last forever: WEC Energy is a well-run electric and gas utility that operates in states with reasonably healthy economies and favorable regulatory environments.

After the blockbuster acquisition of Integrys Energy, electric generation and distribution account for about 66% of the company’s earnings, with the gas utility contributing 23% and a multistate transmission business making up the remaining 11%.

About 70% of WEC Energy’s assets are located in its home state of Wisconsin, where the utility earns a superior 12.7% return on equity.

The beauty of this model is that the company only needs to execute its 10-year capital spending plan of $14 billion to $15.5 billion to grow its earnings and dividend per share by 6% to 8%. Management’s guidance contemplates an annual growth rate of 5% to 7% thereafter.

WEC Energy will recover much of this investment through automatic surcharges, adding to its rate base without petitioning regulators. Regulatory risk in Illinois represents the biggest challenge to the company realizing this guidance.

After dragging its heels on approving Wisconsin Energy’s acquisition of Integrys Energy, regulators have started to investigate whether Peoples Gas withheld information about the cost of replacing aging gas distribution pipelines in the Chicago area.

In the worst-case scenario, WEC Energy may need to accept a lower rate of return on the $2 billion that the company plans to spend on this project over the next five years.

Although an unfavorable outcome from this investigation would present a challenge, WEC Energy shouldn’t have any problems finding alternative investments to pick up the slack, including additional acquisitions.

With $2.9 billion in untapped capacity on its credit facilities and a yield to maturity of 4.1% on its 30-year debt, WEC Energy has ample liquidity.

WEC Energy Group—a holding in our conservative income portfolio—rates a buy up to $50 per share for those who don’t own the stock already.

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