2 Safe, Long-Term Income Stocks

08/03/2011 12:30 pm EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Dividend safety and growth are the keys to the performance of dividend-paying stocks. And companies’ underlying business health is the critical element of both states Roger Conrad of Utility Forecaster.

Our focus as investors needs to remain on the earnings results of the companies we own. The good news is that, based on what we’re seeing so far in the second-quarter numbers, my favorite essential-services companies are still going strong.

Entergy Corp (ETR)
Entergy released second-quarter numbers that strongly support its financial health and dividend safety. The headline number is $1.76 per share, up from $1.71 on an operational basis for the year earlier. Management also affirmed its prior full-year guidance for 2011 of $6.35 to $6.85 per share.

The results affirm the continued strength of the company’s core regulated utility business serving the Mid-South US. Results were driven by prior rate increases as well as “continued strength in the industrial sector.”

The latter is being driven by the growing competitiveness of the US petrochemicals business, which has been buoyed by unprecedented production of natural-gas liquids. That’s a trend that will continue to boost Entergy’s sales to heavy industry, as well as the overall economy of its service territory.

On the other side of the ledger is the health of the company’s unregulated nuclear-power fleet, which continues to be hit by a lower cost of wholesale power in the Northeast.

This, too, looks set to be the trend over the next couple of years, though ironically prices could spike higher if the company is forced to close either the Vermont Yankee or Indian Point (New York) nuclear plants due to regulatory intransigence in those states.

New York regulators can’t overtly block a Nuclear Regulatory Commission (NRC) relicensing of Indian Point. They are doing their level best, however, to delay it, most recently by holding up a water quality permit and demanding “a more thorough analysis of the facility’s measures to mitigate accidents.”

Interestingly, New York Mayor Michael Bloomberg is pushing for prompt relicensing, no doubt concerned about the difficulty (if not impossibility) of replacing a plant that supplies roughly a third of the Big Apple’s electricity needs.

This battle is far from over and will no doubt continue to weigh on Entergy’s share price. So will a similar war in Vermont, where the company and the NRC have taken the state to court to keep the now relicensed Vermont Yankee plant open over state objections.

These preliminary second-quarter results, however, seem to indicate Entergy is more than equipped to weather even the closing of both plants. And indications are that the company and other nuclear operators will avoid post-Three Mile Island style costs from the NRC’s post-Fukushima review of its safety procedures.

That’s an unfolding story that should help Entergy—the nation’s second-largest nuclear power producer—going forward, both in earnings and share price. I’ll have more detail as the full results of the NRC study are released.

I don’t expect a dividend increase until there’s more clarity on the company’s nuclear plants. But Entergy continues to look like a cheap stock trading in the mid-60s for those who don’t already own it. And these numbers portend well for the rest of our power companies as well.

Chevron (CVX)
The oil major’s second-quarter 2011 profits handily beat first-quarter levels, mainly because of higher realized selling prices for its oil output globally. Management also cited improved refining margins, thanks to better industry conditions.

Total oil equivalent production was slightly lower in the US from year-earlier levels, likely reflecting the impact of BP’s (NYSE: BP) spill in the Gulf of Mexico last year. Output outside the US was also slightly lower on a per-day basis through May versus the second quarter of 2010, though global production was up from the first quarter.

We’ll get a better idea about production trends at Chevron once the full set of numbers is released. My view remains the stock is a bit pricey above my buy target of $100 a share, but it remains very much a bedrock holding.

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