Xcel Energy (Xcel)
By Chloe Lutts Jensen, Chief Analyst, Cabot Dividend Investor
From Cabot Wealth Advisory 3/17/15 Sign up for Cabot Wealth Advisory—it’s free!
Utilities have long been considered "widow and orphan stocks" for their slow, steady returns and low volatility. While they're never going to grow fast enough to be hot stocks, utility companies usually operate legal monopolies in their market area, and don't have to worry about losing customers. Utilities in faster-growing regions may grow faster than average, while utilities in slower-growing regions may struggle. And economic conditions can temporarily affect demand levels for electricity and other utilities. But long term, utilities usually manage to achieve annual earnings and revenue growth in the mid-single digit range.
This reliability makes utilities good dividend payers. They have steady cash flows, so they can easily predict how much they'll be able to afford to make in dividend payments. And they rarely cut their dividends during tough times, because utility demand will usually rebound long-term. The average utility yields between 3% and 4% per year, which is usually a pretty good return for the amount of risk you take on-especially today when other "safe" investments are charging you to hold them (see above).
Xcel Energy (XEL) is an electric and natural gas utility that operates in Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. The company just raised its dividend for the 11th consecutive year and the stock currently yields 3.7% per year. Management has said that its long-term goal is to grow both earnings and the dividend by 4% to 6% annually.
The company is making major investments in upgrading existing power plants and building new infrastructure, both to grow earnings and to ensure compliance with environmental regulations. One major initiative underway is the creation of two subsidiary companies called Transcos that will bid on and build transmission projects outside Xcel's service territory, as allowed by new Federal regulations.
These investments are being funded by a combination of debt and equity. Xcel issued $175 million of new equity last year, but management said in the latest conference call that they aren't planning to issue any more equity for at least the next five years. Xcel's debt to equity ratio of 1.1 is in line with the industry average. The company's debt is all investment-grade.
Be aware that the whole utility sector is still getting thrashed by expectations of an interest rate increase: if the Fed makes an announcement without the word "patient" next week you can be sure utilities will take another dive. But this investment is about reliable long-term returns, not short-term gains. XEL is a good choice for investors looking to add an income-generating utility to their portfolio-just be aware of the downside risk and likelihood of heightened volatility until the Fed raises rates.
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From Cabot Wealth Advisory 11/12/14 Sign up for Cabot Wealth Advisory—it’s free!
Some of the best performers after last week’s jobs report were utility stocks. These staid “widow and orphan” stocks were already having a great run, attracting lots of investor dollars in October as interest rates and the equity market fell in tandem. Compared to bonds and other stocks, utilities offer relatively high yields and low betas. And the party seems to be continuing even as the equity market recovers, with the utility sector overall rising about 1% on Friday.
For utility stocks, today is high tide.
One of my favorite names in the sector is Xcel Energy (XEL), which I added to the Cabot Dividend Investor Safe Income portfolio on October 1. We’re sitting on a 10.5% gain five weeks later, and while a quick profit wasn’t our primary goal here, none of my subscribers have complained.
Here’s part of what I wrote about XEL when I recommended it at the end of September:
“With the stock market giving mixed signals—raising the odds of a correction or simply continued choppy action—we’re adding some stability to our Safe Income portfolio this month with a low-beta utility stock. But we’re not sacrificing income or growth to do it: Xcel Energy (XEL) is an electric utility with operations in thriving areas of the Midwest and West that consistently grows both earnings and the dividend by about 5% per year. Xcel Energy pays quarterly dividends of $0.30 per share, for a yield of 3.9% at current prices.
“Xcel has paid dividends since 1985, and has increased the dividend every year for the past 10. The annual increases tend to be boosts of 5% or less, typical for utilities, which are more focused on consistency than growth. Over the past decade, the annual increases have averaged 4.7% per year. Management has said that its long-term goal is to grow both earnings and the dividend by 4% to 6% annually.
“Combined with the moderate earnings growth predicted by Wall Street, this earns Xcel a Dividend Growth Rating of 7.60 from IRIS [my dividend stock rating system, learn more here]. The utility’s Dividend Safety Rating is even higher, at 9.31, thanks to its long and consistent history of prioritizing dividends.
“While consistent and slowly rising dividends are the number one draw here, Xcel is also a growing company, [thanks mainly to] population growth in Xcel’s service regions, driven by their strong economies. In the last quarter, job growth in Xcel’s service region—which includes Colorado, New Mexico, North Dakota, South Dakota and Texas—outpaced the national average significantly, at 2.3% to 1.8%.”
Today, XEL is 10% higher so the yield is lower, at 3.6%, but I still think the stock is a great bond substitute for investors who want to collect steady income from their portfolios without taking on too much risk. If that sounds like you, I also encourage you to consider joining Cabot Dividend Investor today, so you can get my ongoing guidance on XEL plus lots of other income-and-growth ideas. For more information, click here.
|Xcel Energy (XEL)
414 Nicollet Mall
Minneapolis, Minnesota 55401
|Index Membership: N/A
Industry: Electric Utilities
Full Time Employees: 11,457
3/17/15 Xcel Energy (XEL): Raised dividend for 11 consecutive years