Kelley Wright — dividend specialist and editor of Investment Quality Trends — highlights high quality, blue chip stocks trading at undervalued levels relative to their historical yields; here are two featured ideas from the utility sector.
American Water Works Company (AWK) is the largest publicly traded water and wastewater utility company in the U.S. as measured by sales and customer count. The company provides water, wastewater, and related services to greater than 14 million people in 24 states.
AWK operates in two reportable segments: Regulated Businesses and Market Based Businesses. AWK’s 2023 sales mix was approximately 92% water and 8% wastewater. Regulated Businesses own subsidiaries that provide water and wastewater utility services to approximately 1,700 communities in 14 states, serving around 3.5 million customers.
Market Based Businesses are not regulated by state public utility commissions and primarily include the Military Services Group, which enters into long-term contracts, generally 50 years, with the U.S. Department of Defense for the operations and maintenance of the water and wastewater systems on certain military installations.
Part of AWK’s strategy is to acquire smaller, less efficient water companies and to acquire small municipal systems. The company expects to grow dividends at a 7%-9% growth rate while maintaining a dividend payout ratio between 55% and 60%. AWK maintains a $16 billion-$17 billion capital spending plan from 2024 to 2028.
The return on invested capital, free cash flow yield and private to value ratio are 4%, -4%, and 6.5 respectively. Economic Earnings = -$3.64 versus GAAP of $4.91. The Economic Book Value is $21.45 per share.
Portland General Electric Company (POR) engages in the generation, purchase, transmission, distribution, and retail sale of electricity in the state of Oregon. The company has a mix of generating resources that includes hydropower, coal and gas combustion, and wind, as well as key transmission resources.
The company’s energy requirement is met with both company-owned generation and power purchased in the wholesale market. POR purchases power and natural gas in the open market or under short-term, long-term, or variable-priced contracts.
POR’s investments in a reliable and clean energy future are a key element of the Integrated Resource Plan (IRP), which will require compliance with statutory renewable standards and consideration of state and local government initiatives to decarbonize the local economy.
Additionally, the company is working to advance transportation electrification, with projects to expand and increase access to electric vehicle charging stations and partnering with local mass transit agencies to transition to a greater use of electric vehicles.
POR’s service area includes the “Silicon Forest,” which houses companies like Intel and Microchip Technologies. In recent years, the company has worked to fortify this position via significant investments in infrastructure, including a $6.2 billion plan to expand and modernize its distribution network.
POR operates in a favorable regulatory environment. The Oregon Public Utility Commission (OPUC) has consistently backed the company’s investment initiatives and rate increase requests.
The OPUC approved a 14% increase in POR’s rate base in late 2023, and the company has requested an additional 7.4% rate hike for 2025. Regulatory support gives POR the ability to deliver consistent and growing profits, even as it undertakes significant CAPEX.
The return on invested capital, free cash flow yield and private to value ratioThe ROIC, FCFY, and PVR are 4%, -7%, and 1.9 respectively. The Economic Earnings = -$1.99 versus $2.62 GAAP. The Economic Book Value is $25.03 per share.
