Brett Owens is a leading on income investing; the editor of the industry-leading Contrarian Outlook ...
No to Bonds, Yes to Dividends
10/21/2010 1:00 pm EST
Roger Conrad, editor of Utility Forecaster, says investors should focus less on bonds and more on dividend-paying stocks, and he recommends a money-making utility.
Last month, Southern California Edison issued 30-year bonds yielding just 4.539%—the lowest rate ever for A-rated paper of that maturity. Other utilities issued debt that literally slashed their interest costs in half, while some extended maturities to 50 years or more.
Such low yields mean real buying opportunities in fixed income are almost non-existent. But power, communications, energy transport, and water companies are awash in low-cost capital as rarely before. That makes now an ideal time for them to build and buy cash-generating assets—the key to rising earnings, dividends and stock prices.
Today’s record-low bond yields are, however, the best possible news for companies’ dividend-paying equities. NV Energy’s (NYSE: NVE) refinancing of high-cost debt, for example, will boost earnings in the short term by cutting interest expense and over the long term by locking in low-cost capital. And it will eliminate near-term refinancing risk as well. That’s supportive of dividend safety and growth.
The irony in today’s market is [that] investors continue to prefer paltry yields on bonds to high equity dividends. Some fear higher dividend taxes, though political trends increasingly point to an extension of today’s rates. Others worry about a reprise of the 2008 crash, though high-quality companies weathered the last one and are better prepared than ever for another.
Economic trends, political winds, and investment fads come and go. But companies that grow cash-generating assets build wealth year in, year out.
Including reinvested dividends, MDU Resources (NYSE: MDU) has multiplied investors’ money tenfold since September 1990. Along the way, $38 million in annual revenue has grown to over $2 billion, fueled by nearly a million regulated utility customers, 1.1 billion tons of reserves of construction aggregates, and a leading oil and gas production operation.
The company also owns 3,700 miles of energy pipelines/storage, and leverages profits with related energy management and construction services.The weak economy has crimped mining and construction profit the past two years. But thanks to asset balance and conservative financial policies—equity is two times debt, and the payout ratio is less than 50%—overall results have held steady.
The company has kept expanding, this year adding 40,000 more acres in the Bakken Formation (a huge underground layer of rock in the prairie states and western Canada that may have significant reserves of oil—Editor), 30 megawatts of wind power capacity, and 33% more energy storage capacity.MDU shares have tracked oil prices closely for decades, actually hitting an all-time high on the same day in July 2008 that oil prices peaked. This relationship should ensure another big run as the US economy recovers, even as the company steadily expands.
Buy MDU Resources up to $24. (It closed Wednesday at about $21—Editor.)
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