John Reese selects stocks based on a detailed historical analysis of the strategies of many of the s...
Two Utility Stocks to Look at Now
09/03/2013 6:00 am EST
Utility expert Roger Conrad thinks that the selling in this sector has been overdone and shares the factors he considers in his analysis along with two of his favorites.
SPEAKER: I'm talking utilities with Roger Conrad today. Hi Roger, and thanks for joining me.
ROGER CONRAD: Thank you very much for having me.
SPEAKER: Now, tell me what's going on with utilities. They've sort of been knocked on their head lately.
ROGER CONRAD: You're absolutely right, you know, and they were kind of a lagger earlier in the year as well. We saw a lot of interest in some of the other dividend paying groups like MLPs for example which have done pretty well, continue to do pretty well, but people got a little bit, started to get a little worried about interest rates and so forth. We've seen a lot of negative commentary I think.
ROGER CONRAD: Which is typical, a lot of people concerned about a number of issues and I'm starting to get questions from readers about things like rate cases that are being filed and decisions being made in that area, but I think what we're seeing right now is pricing coming down, still a very very good solid stable growth story out there, and this is the time when investors really want to strike, buying companies that maybe they were looking at for a long time and wondering when could I get in at a decent price, and this is the time when you do those types of things.
SPEAKER: Well, how should they begin to analyze it? There are a lot of utilities out there and some are better than others, and you don't want to just chase yield, so what are some of the criteria that an investor should look for?
ROGER CONRAD: Well, the utilities story is basically capital spending plus regulatory support because right now most of the industry, what can be charged to customers, that's determined by regulation.
ROGER CONRAD: But if they can spend money, they can get regulatory support to earn a return on that investment, then you have pretty much a guaranteed formula for rising earnings, rising dividends, and stock prices follow dividends over time, so this is really, that relationship is in a nutshell what investing in utilities is all about. There's lots of different numbers you can look at to determine how well a company is doing on that score, the payout ratio for example which is earnings, or dividends as a percentage of earnings. You want to factor out one time events -
ROGER CONRAD: - that will distort numbers, and if you look at in fact these headline generated stories about earnings, typically they're going to have what are called the headline earnings, what the bottom line gap number is, which may or may not have anything to do with what the real probability is.
SPEAKER: With reality, exactly.
ROGER CONRAD: So it's a number that you want to definitely look at it in a qualified way. I look at things with regulators in a very subjective way, so this is where a lot of analysis and study really comes in handy.
SPEAKER: Look at a history.
ROGER CONRAD: Right, history, familiarity. As a rule of thumb, utilities in the south, southeast or midwestern parts of the country have tended to do better in terms of regulation, in terms of being able to plan long term. It's not so much getting ex percentage of a dividend, sorry, of a rate increase as requested, it comes down to is regulation predictable enough where companies can make long term decisions about these huge capital projects, and can they earn a return on the investment, can the investment community be comfortable loaning utilities or buying their stock when they're making these investments, so these are really the questions that you answer, but they don't really change, the answers only really change that often in any kind of dramatic way, so a lot of these sell-offs we see such as the one we've just been through the last few weeks are really pretty meaningless when it comes down to it. They really don't have much -
SPEAKER: Long term.
ROGER CONRAD: - to do with this wealth generating formula which is really what utility investing is all about. So what you have is a lot of companies that are lower priced now that have this great growth formula, those are the ones to focus on. They're, as you pointed out, not all the utilities are created equal or are operating equally well, and some of them are justifiably lower. I think prices earlier this year got very, very high, particularly for a number of very high quality names that people kind of latched onto. That's not the case anymore though now, so I think there's a lot of value out there, and Conrad's Utility Investor, that's what we're focusing on right now. I think it's a great opportunity to take a look at some really good names.
SPEAKER: Give me one name.
ROGER CONRAD: I'll give you, Southern Company I think is right now in a pretty good place. They have a couple of huge capital projects, people are sort of questioning how much they're going to be able to earn on those projects, but basically they're recovering the costs as they invest, that's going into higher dividends, higher earnings, and I'll give you a bonus too, Dominion Resources, same thing, two great outcomes of the regulatory body in Virginia in this past month. I think an excellent stock. Very, very conservative stocks and with pretty much wired in growth.
ROGER CONRAD: It doesn't get any better than that.
SPEAKER: Great. Thank you, Roger.
ROGER CONRAD: Thank you.
SPEAKER: And thanks for being with us on the MoneyShow.com video network.
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