The narrative on Wall Street for some time has been that the Federal Reserve, which will finish the quantitative easing bond purchases this month, would raise rates in the summer of next year. The new reality is the economy is very fragile and that raising rates prematurely could throw the recovery off track. That has some moving the start date for raising rates to 2016. A new research report from Deutsche Bank acknowledges that utility stocks have had a tremendous year and have become pricey, but they still are a solid bet in the low rate, slow growth environment.
The Deutsche Bank team has narrowed the utility sector to a very select group of stocks to buy. We screened that group for the top-yielding companies.
CMS Energy Corp. (NYSE: CMS) reported slightly disappointing earnings last week, giving investors a chance to buy the stock at a better entry point. The company reported net income of $94 million, or $0.34 per share, for the third quarter of 2014 and $381 million, or $1.39 per share, for the first nine months of the year. A bright spot in the report was that the company reaffirmed 2014 adjusted earnings per share guidance of $1.76 to $1.78, consistent with the company’s long-term plan of 5% to 7% annual earnings per share growth. CMS is a Michigan-based company that has an electric and natural gas utility, Consumers Energy, as its primary business and also owns and operates independent power generation businesses.
CMS shareholders are paid a 3.4% dividend. The Deutsche Bank price target for the stock is $33. The Thomson/First Call consensus target is $32.42. Shares closed Monday at $32.11.
Duke Energy Corp. (NYSE: DUK) is the largest market cap stock in the utility sector and has performed outstanding this year. It is one of the leading U.S. utility companies, given its stable earnings base, as a significant portion of the company’s earnings are derived from regulated operations. Also, the company has delivered a healthy financial performance in the past and remains an attractive option for income-seeking investors.
Duke shareholders are paid an outstanding 4.0% dividend. Deutsche Bank has a $78 price target, and the consensus target is posted at $77.18. Shares of Duke Energy closed Monday above both targets at $80.61.
Exelon Corp. (NYSE: EXC) is one of the largest competitive U.S. power generators, with more than 35,000 megawatts of owned capacity, comprising one of the nation’s cleanest and lowest-cost power generation fleets. The company’s Constellation business unit provides energy products and services to approximately 100,000 business and public sector customers and approximately a million residential customers. Many on Wall Street expect strong third-quarter numbers when the company reports on Wednesday. The introduction of a new capacity performance product next year could add $0.40 per share to earnings in the 2017 – 2018 time-frame.
Exelon investors are paid a solid 3.5% dividend. Deutsche Bank has a $36 price target, while the consensus figure is $35.87. Shares ended Monday at $35.20.
Public Service Enterprise Group Inc. (NYSE: PEG) operates nuclear, coal, gas and oil-fired generation facilities with a generation capacity of approximately 13,226 megawatts. Roughly 40% of its merchant generation capacity is nuclear and 20% is coal, and many analyst on Wall Street think that the company will be a relative beneficiary of the EPA draft rules that were released earlier this year.
Investors are paid a 3.7% dividend. The Deutsche Bank price target is $43. The consensus target is $38.33, but the stock closed Monday at $39.46.
Portland General Electric Co. (NYSE: POR) operates five thermal plants, seven hydroelectric plants and a wind farm located at Biglow Canyon in eastern Oregon, as well as approximately 1,100 circuit miles of transmission lines and 24,000 circuit miles of primary and secondary distribution lines that deliver electricity to its customers.
Portland General investors are paid a 3.2% dividend. Deutsche Bank has put a $36 target on the stock. The consensus target is $35.50. Shares closed at $35.36.
While the utility rally has been strong this year, the Deutsche Bank team has focused on the top companies that can continue to maintain dividend coverage and grow earnings at mid to high single digits each year. These are very good stocks for conservative, income-oriented accounts looking to protect principal.