Robert Rapier's Utility Trio

08/09/2018 5:00 am EST

Focus: UTILITIES

Robert Rapier

Editor, Investing Daily

Congratulations to Robert Rapier; the long-standing energy sector expert has just become the senior editor for Investing Daily's Utility Forecaster. Here, he reviews some of his current top utility stock ideas.

Every year, NFL scouts watch prospective professional football players showcase their measurables; they watch them run, lift weights, conduct various drills, and interview them to assess their skills.

They will rank players based on the measurables, and then adjust those ratings up or down based on more subjective criteria.

Utility Forecaster uses much the same process with companies. We look at what we believe are the important measurables, adjust rankings based on more subjective criteria, and make our picks. Here's three current favorites.

1. Dominion Energy (D)

Dominion is a blue-chip utility, the fourth largest in the country. The company supplies electricity and natural gas to nearly six million customers in 19 states. Following the most recent quarter, Dominion reported that adjusted earnings per share (EPS) jumped 17.5%, to $1.14, surpassing analyst estimates by 8.4%.

For the full year, management reaffirmed its EPS guidance range of $3.80 to $4.25, for potential growth of more than 12% year over year.

The Federal Energy Regulatory Commission (FERC) just approved the proposed merger between Dominion Energy and SCANA Corporation (SCG), saying the merger “is consistent with the public interest.” Dominion president and CEO Thomas Farrell II said he hoped to complete the deal by the end of 2018, but some hurdles remain.

Dominion currently yields 4.8%, and its earnings over the next five years are projected to grow at 5.8% annually. Dominion has a Debt/Asset ratio of 48.5%, higher than the average of the Growth Portfolio Core Holdings of 38.5%. However, it plans to shore up its balance sheet by selling $1 billion to $1.5 billion of non-core assets over the next 18 months.

2. TransCanada (TRP)

Going purely by the measurables, TransCanada would have been the runaway #1 pick. The company’s forecast 5-year earnings growth rate is 8.6%, well above the portfolio average of 6.8%.

TransCanada is the highest rated company in the portfolio according to S&P Capital IQ consensus ratings, with 16 of 17 analysts rating the company Buy or Outperform. The company currently yields 4.8% and has increased its dividend for 18 consecutive years.

So, what’s not to like? A couple of things. TransCanada has the highest debt load among our core holdings, with a Debt/Assets ratio of 50.8%. This is primarily of function of being a pipeline company and is in line with the debt ratios of other pipeline companies.

Another negative is that overall sentiment in the midstream sector remains tepid. Investors remain wary about the midstreams — even those companies that aren’t MLPs.

Finally, negative perceptions about TransCanada’s Keystone XL Pipeline will dominate the news headlines for a few years. These minor “character issues” are the only reasons TransCanada isn’t my #1 pick. But it is a solid pick for years to come.

3. AT&T (T)

AT&T could have also easily been the #1 pick. It has had a few missteps over the past year, which led slight earnings misses in two of the past three quarters and a serious sell-off in the company’s shares.

The company is presently trading near its 52-week low, which has pushed the yield up to an astounding 6.3%. AT&T has increased its dividend for 32 consecutive years, and with a current payout ratio of only 57% it has room to grow.

But the Justice Department’s appeal of AT&T’s deal for Time Warner introduces some uncertainty into the company for a few months. I don’t believe the DOJ will prevail, but the slight uncertainty puts a cloud over the company. Until the appeal has been decided, AT&T is precluded from being my #1 pick. AT&T is a Buy below $40.

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Robert Rapier's Utility Trio
08/09/2018 5:00 am EST

Congratulations to Robert Rapier; the long-standing energy sector expert has just become the senior ...