Infrastructure

Analyst Likes 5 Top Utilities Despite Interest Rate Risk

For the longest time in recent history, the Federal Reserve has kept interest rates at near zero. Great if you want to buy a house, lousy if you want to buy a certificate of deposit. With interest rates finally set to head higher this year, investments like utilities that are bought often for income may be ready for a sell-off.

A new research report from Baird points out that while environmental policy uncertainties have kept some big-ticket capital investment off the table, support for accelerated investment in core utility infrastructure (wires and pipes) continues to speed up. They also think that 5% to 7% earnings growth at some of the firm’s top investment ideas is a distinct possibility.

Baird has 14 utility stocks in the firm’s coverage universe. These five are rated Outperform.

Alliant Energy

This company’s utility subsidiary, Wisconsin Power and Light Company, utilizes the trade name of Alliant Energy. Alliant Energy Corp. (NYSE: LNT) is based in Madison, Wisc., and provides electric service to 465,000 customers and natural gas service to approximately 185,000 customers in more than 600 communities across central and southern Wisconsin.

The company recently replaced about 700 megawatts of aging generation with a highly efficient natural-gas facility. This project will play a large role in the modernization of its Wisconsin fleet and reflects a continued commitment to environmentally responsible resources.

Alliant shareholders are paid a solid 3.7% dividend. The Baird price target for the stock is $68. The Thomson/First call consensus price target is $66.33. Shares closed Thursday at $60.27

CMS Energy

CMS Energy Corp. (NYSE: CMS) is a Michigan-based company that has an electric and natural gas utility as its primary business and also owns and operates independent power-generation businesses. The Baird team feels the stock should trade in line with peers, reflecting what they view as above-average total prospects spurred on by an extensive pipeline of infrastructure investments supported by a constructive regulatory environment.

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The company beat first-quarter earnings estimates and the Baird team points to effective cost controls and increasing infrastructure investment as helping to offset negative weather comparisons.

CMS shareholders are paid a 3.48% dividend. Baird has put a $38 price target on the stock, and the consensus target is set at $34. Shares ended trading on Thursday at $33.35.

PNM Resources

PNM Resources Inc. (NYSE: PNM) is primarily involved in the generation, transmission and distribution of electricity. The company generates electricity using coal, nuclear fuel, natural gas, solar, geothermal and wind energy sources. It also provides regulated transmission and distribution services. As of December 31, 2014, the company’s owned or leased facilities had a total net generation capacity of 2,397 megawatts. It serves approximately 753,000 residential, commercial and industrial customers, as well as end-users of electricity in New Mexico and Texas.

PNM reported very solid first-quarter earnings. On a per-share basis, the company had net income of $0.18. Adjusted for non-recurring costs, earnings were $0.21 per share on revenues of $332.9 million. The results surpassed Wall Street expectations. The average estimate was for earnings of $0.18 per share.

PNM shareholders are paid a 3.08% dividend. The Baird price target is $32, and the consensus estimate is $30.38. Shares closed Thursday at $25.97.

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Vectren

Vectren Corp. (NYSE: VVC) energy delivery subsidiaries provide gas and electricity to more than a million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio. Vectren’s no-utility subsidiaries and affiliates currently offer energy-related products and services to customers throughout the United States. These include infrastructure services and energy services. The Baird team applies a premium to the price target for the stock, which reflects what they see as above-average growth opportunities at the company’s very stable utility subsidiaries and robust infrastructure services activity for 2015 and beyond.

Vectren investors are paid a 3.62% dividend. Baird has a $49 price target, and the consensus target is lower at $45.75. Shares closed Thursday at $41.91.

Xcel Energy

Xcel Energy Inc. (NYSE: XEL) generates electricity using coal, nuclear, natural gas, hydro, solar, biomass, oil and refuse and wind energy sources. It is also involved in the purchase, transportation, distribution and sale of natural gas. In addition, the company engages in developing and leasing natural gas pipelines, and storage and compression facilities, as well as investing in rental housing projects. It serves residential, commercial and industrial customers, as well as public authorities, in the portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin.

The company missed first-quarter earnings estimates, and the Baird team cited higher operating expenses and less favorable weather for the decline. They also think that rate relief pushes electric margins higher. They see upside to current forecasts that could stem from investment in natural gas supply and pipes, establishing an electric transmission company and a potential ramp in emission reduction efforts.

Xcel shareholders are paid a very nice 3.9% dividend. The Baird price target is $38, and the consensus target is $36.81. Shares closed Thursday at $33.48

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While the big money made in utility stocks over the past five years may be over, some of these top companies have seen significant price declines since the beginning of the year. They still make good sense in a conservative portfolio.