Image Source: UnsplashKelley 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.American Water Works operates in two reportable segments: Regulated Businesses and Market Based Businesses. The company’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 American Water Works’ strategy is to acquire smaller, less efficient water companies, as well as 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%. American Water Works 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 approximately $21.45 per share.Meanwhile, 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. Portland General Electric purchases power and natural gas in the open market or under short-term, long-term, or variable-priced contracts.Portland General Electric’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.Portland General Electric’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.Portland General Electric 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 Portland General Electric’s rate base in late 2023, and the company has requested an additional 7.4% rate hike for 2025. Regulatory support gives Portland General Electric 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 ratio are 4%, -7%, and 1.9, respectively. The Economic Earnings = -$1.99 versus $2.62 GAAP. The Economic Book Value is approximately $25.03 per share.
About the Author
Kelley Wright entered the financial services industry in 1984 as a stock broker, first with a private investment boutique in La Jolla, and later with Dean Witter Reynolds. In 1990, he left the retail side of the industry for private portfolio management. In 2002, Mr. Wright succeeded Geraldine Weiss as the managing editor of the Investment Quality Trends newsletter, as well as the chief investment officer and portfolio manager for IQ Trends Private Client.His commentaries have been published in Barron’s, Forbes, BusinessWeek, Dow Jones MarketWatch, The Economist, and many other business and financial periodicals. Mr. Wright is an active speaker at trade shows and investment conferences, and he is a frequent guest and contributor to radio and CNBC. He is the author of Dividends Still Don’t Lie, which was published in February, 2010, by John Wiley & Sons, Inc.More By This Author:BLK: Record Inflows, Double-Digit Revenue Growth In Q3TSLA: What to Do in the Wake of its “Disappointing” Robotaxi DayFBGRX: A Growth Stock Fund For A Market Rallying On Four Positive Forces
