The recent slowdown in the stock market may raise the demand for “safe haven” and stable stocks including Utilities stocks that tend to offer high dividend yields and are generally less volatile than other stocks. Is it time to reconsider investing in utility companies such as Integrys Energy Group (NYSE:TEG) and FirstEnergy (NYSE: FE)? Let’s examine the latest developments in the electric market and determine what’s up ahead for this industry.
Electricity prices are increasing – will this trend continue?
According to the latest Energy Information Administration update, electricity prices rose in the first quarter of 2013 by roughly 1.2%. Moreover, revenues from retail sales of electricity also increased from $84.3 billion in the first quarter of 2012 to $87.4 in the first quarter of 2013 – a 3.6% growth. This means, part of the gain in revenues in the industry was due to price increase and part was due to rise in consumption.
The chart below shows the developments in electricity prices in the past several years.
Are utilities stocks still worth having?
In the recent quarter, FirstEnergy maintained its profit margin stable at 21%, which is the same as in the first quarter of 2012. But Duke Energy (NYSE:DUK) and Integrys Energy Group had a rise in profit margin that reached in the first quarter of 2013 18% and 17%, respectively.
In the first quarter of 2013, revenues of FirstEnergy fell by 8.6% in the first quarter of 2013 (year-over-year). Integrys Energy’s revenues sharply rose by 34% in the first quarter of 2013. Most of the growth in sales was attributed to the spike in natural gas utility segment. The hotter than normal winter that was recorded in 2012 made this year’s winter augment the demand for natural gas.
Duke Energy’s net sales also sharply pulled up by 62.5% in the first quarter. Most of the rise in revenues is also due to the sharp gain in heating degrees, which according to the company’s quarterly report, rose by 35% to 49% depending on Duke’s subsidiaries.
Thus, FirstEnergy hasn’t augmented its revenues in the first quarter of 2013; Duke and Integrys had a sharp increase in revenues, partly related to the demand for natural gas (for Integrys). Looking forward will these companies continue to see such a sharp rise in revenues? In order to answer this question let’s turn to the estimated future developments in the electricity market including price and consumption for the rest of 2013.
The recent rise in profit margin may have been partly driven by the rise in electric prices in the first quarter of 2013 compared to the same time in 2012. But the EIA projects the demand for electricity will dwindle in this summer compared to last year’s summer, which was hotter than normal. This means, in the coming months, the price of electricity will be lower compared to 2012. Nonetheless, the EIA estimates total consumption in the U.S is expected to rise by 1.3% in 2013 (year-over-year) on account of 0.4% gain in consumption and 0.7% population growth.
The price of electricity is projected to rise by 1.1% in 2013 compared to 2012. Therefore, revenues of an average company will roughly rise by 2.4% in 2013. This benchmark is something worth remembering for evaluating the above mentioned companies in the coming quarters.
Nonetheless, since the EIA project last year’s hotter than normal summer won’t repeat this year; this will bring down not only electricity prices but also consumption in the coming months (compared to last year). Therefore, we might see a drop in revenues growth of the above-mentioned companies. Duke and Integrys, unlike FirstEnergy, recorded sharp gain in the first quarter of 2013; thus, they are likely to finish 2013 with an increase in revenues compared to 2012, even if revenues will be lower in the coming quarters compared to last year.
One of the main reasons investors like keeping utility companies is due to their high dividend yield: Integrys Energy offers a dividend of $2.72 per share per year – a yearly yield of 4.73%; FirstEnergy gives an annual dividend of $2.20, which comes to an annual yield of 5.74%; Duke Energy pays a dividend of $3.06 per share per year – a yearly yield of 4.52%. If these companies will finish the year with higher profits than they had in 2012, they may raise their dividend payments in the near future.
Major utility companies might see a drop in revenues in the coming months but overall 2013 is likely to be better than 2012 especially for Integrys and Duke. The steady growth in revenues along with high dividend yields is likely to keep these companies a compelling investment.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.