My Utilities-related earlier article, Picking The Best Electric Stocks For Market-Beating Returns, can be viewed here. It is always my practice to compare the price valuations of a company among its peers and then choose the one or more based on my perception and situation.

I chose to compare the following companies this time:

Ticker Company Type
AEP American Electric Power Company Inc. Electric Utilities
BKH Black Hills Corp. Multi-Utilities
DUK Duke Energy Corp. Electric Utilities
ED Consolidated Edison, Inc. Electric Utilities
ETR Entergy Corporation Electric Utilities
EXC Exelon Corporation Multi-Utilities
NEE NextEra Energy Inc. Multi-Utilities
PPL PPL Corp. Electric Utilities
SO Southern Company Electric Utilities
XEL Xcel Energy Inc. Multi-Utilities

Some of the basic information is below:

Ticker Dividend Growth Years Dividend Paid Since Moody’s Credit Rating S&P’s Credit Rating *PEG *LT Debt/Eq.
AEP 11 1910 Baa1 A- 3.62 1.33
BKH 50 1942 Baa2 BBB+ 3.73 1.41
DUK 13 1927 Baa1 A- 10.18 1.29
ED 45 1885 Baa2 A- 6.99 1.05
ETR 5 1994 Baa2 BBB+ 2.67 1.75
EXC 5 2001 Baa2 BBB+ 1.12
NEE 10 1989 A1 AA- 4.66 1.15
PPL 20 1946 Baa2 A- 1.62
SO 18 1989 Baa2 A- 3.76 1.63
XEL 16 1972 Baa1 A- 4.21 1.45

(Source: * PEG and LT Debt/Equity data is from Finviz.com, while the rest of the data are compiled by author from various internet available sources.)

  • BKH and ED stands out with the sequential dividend growth history.
  • ED and AEP have a history of 100+ years of distributing dividend without a break besides having a high credit rating for this sector. BKH, DUK and PPL have been doing so for 75+ past years.

These dividend distribution streaks, besides the companies’ credit ratings, give me a comfort that they will continue to do so for the next several generations. Any economic downtrends or headwinds or interest rate scenarios will all be relatively short term.

I wonder why I did not open out a reasonable position in BKH much earlier. BKH is Dividend King now with 50 years of sequential dividend increases. This fact is not properly recorded in many data sources, for reasons not known to me. SA data providers mention this as 31 years, and so do many other sources. But in the company’s own words, “We have continuously paid quarterly dividends since 1942. Annual dividends have increased since 1971.” (Source: Black Hills Corp., Investor Info page) This one fact made me consider and add BKH to my portfolio when the price and the dividend yield metrics are reasonable or comparable.

I am projecting target prices based on:

  1. The highest dividend yields over the past five years. (historical yearly low prices)
  2. Dividend discount model where the future dividend incomes are discounted at a desired rate of return, which I pegged at 10%.
  3. A fair P/E based price projection using the forward estimated earnings per share (Fwd. EPS) – I value it assuming 15 as a fair P/E.
  4. A fair dividend yield-based price target. The share market has given an approximate cumulative aggregate return of 6% over decades. A 5% dividend yield as of now with prospects of even a slender dividend growth with the passing of years should provide the average share market returns expected.
  5. Then, I table all these, find an average of target prices, and also find where they stand relative to current market prices.
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All the data are in a dynamic worksheet so that I can track the real figures at any given moment in real time and choose which one I want to buy. Those who want to follow similar methods can very easily create a table with the final results on this table and get the CMP and the relative position updated automatically in their own sheets. But always do your own diligence to use the data, as I cannot be held responsible. I am sharing the data with a good intention, without making any buy/sell recommendations.

Target buy price based on historical highest dividend yields

I use the dividend yield history as a guide to find a fair price for stocks. The following table shows the highest dividend yield during the past 5 years (corresponding to 52-week lows of each year and the dividend yield at that point. Source = Author’s personal data analysis).

Ticker Yr2019 Yr2018 Yr2017 Yr2016 Yr2015 Price at 5 yr. Highest Div. Yield Dividend Yield @ CMP
AEP 3.75% 4.03% 3.87% 4.00% 4.11% 68.13 3.57%
BKH 3.37% 3.82% 3.17% 3.76% 4.40% 48.64 3.88%
DUK 4.54% 5.05% 4.58% 4.79% 4.95% 76.44 4.85%
ED 4.04% 4.02% 3.83% 4.22% 4.57% 66.96 4.31%
ETR 4.40% 4.98% 5.03% 5.23% 5.45% 68.26 3.82%
EXC 3.34% 3.88% 3.93% 4.81% 4.94% 30.97 4.15%
NEE 2.96% 3.06% 3.35% 3.41% 3.29% 164.22 2.01%
PPL 5.94% 6.48% 5.14% 4.74% 5.16% 25.62 6.00%
SO 5.69% 5.62% 4.92% 4.83% 5.20% 44.99 4.90%
XEL 3.40% 3.66% 3.60% 3.86% 4.03% 42.68 2.51%

Please note that I have not included the current-year price movement or yields. This is a special year in which the prices have moved to extreme levels. A repeat of any such dramatic crash is possible but not expected by me. The prices can trend lower, slowly in steps, and one can decide as and when the chances surface.

Target buy price based on dividend discount model

Formula and calculation of the Gordon Growth Model is based on the mathematical formula, Price Target = d1 / (r – g), where d1 is the next-year expected dividend, which grows at a constant growth rate of g% pa, and r% is the constant cost of capital (or expected rate of return). I have used the average of 1-year, 3-year, 5-year and 10-year DGRs as the forward DGR with a limit of 7% as the most realistic approach to the current situation.

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Ticker DGR 1year DGR 3years DGR 5years DGR 10years Future DGR Projected Current Dividend p.a. Target Price (Dividends DCF)
AEP 3.32% 5.42% 5.43% 5.05% 4.81% 2.80 55.69
BKH 4.39% 5.74% 5.73% 4.04% 4.98% 2.14 44.46
DUK 2.00% 3.06% 3.35% 0.55% 2.24% 3.86 50.74
ED 3.38% 3.50% 3.31% 2.54% 3.18% 3.06 46.40
ETR 1.64% 2.05% 2.18% 1.39% 1.82% 3.72 46.19
EXC 5.52% 5.31% 4.29% -3.12% 3.00% 1.53 23.06
NEE 12.00% 12.53% 12.70% 10.84% 7.00% 5.60 209.07
PPL 0.61% 1.66% 2.05% 1.72% 1.51% 1.66 19.67
SO 3.25% 3.36% 3.37% 3.49% 3.37% 2.56 39.85
XEL 6.17% 6.10% 6.09% 5.55% 5.98% 1.72 45.40

Please note the dividend growth rates of NEE in the past remained excellent. The future projection at 7% might appear lower or higher depending on how long we intend to hold it. However, I used a 7% rate to provide that premium to NEE, while the rest of companies are not testing that limit. In general, I would like to remain prudent and set 5% as my cautious projection for many years into the future. Except NEE and XEL, all other companies are well within those limits.

Target buy price based on fair dividend yield and forward P/E

I view a 5% dividend yield and a 15 P/E on forward EPS as bases for a fair target price for utilities.

Ticker Dividend pa Div. Yield at CMP Price at 5% Div. Yield EPS (TTM) EPS next Y Forward P/E Target Price at 15 P/E
AEP 2.80 5.93% 56.00 3.84 4.65 16.87 69.75
BKH 2.14 6.99% 42.80 3.16 3.86 14.29 57.90
DUK 3.86 6.56% 77.20 2.84 5.22 15.25 78.30
ED 3.06 6.37% 61.20 3.99 4.53 15.71 67.95
ETR 3.72 6.12% 74.40 6.13 5.95 16.35 89.25
EXC 1.53 7.92% 30.60 2.71 2.92 12.63 43.80
NEE 5.60 3.54% 112.00 7.33 9.87 28.25 148.05
PPL 1.66 8.90% 33.20 2.30 2.46 11.24 36.90
SO 2.56 6.36% 51.20 3.05 3.32 15.74 49.80
XEL 1.72 4.33% 34.40 2.67 2.97 23.10 44.55

(* Forward EPS data is sourced from Finviz.com – as and when I prepared it.)

My target buy prices

The following is the summary of fair price targets.

Ticker Price at 5% Div. Yield Price at 5 yr. Highest Div. Yield Target Price (Dividends DCF Model) Target Price at 15 P/E Fair Price (Average) CMP Premium/ (Discount)
AEP 56.00 68.13 55.69 69.75 62.39 78.37 20.39%
BKH 42.80 48.64 44.46 57.90 48.45 55.21 12.24%
DUK 77.20 76.44 50.74 78.30 70.67 79.55 11.16%
ED 61.20 66.96 46.40 67.95 60.63 71.07 14.69%
ETR 74.40 68.26 46.19 89.25 69.53 97.26 28.52%
EXC 30.60 30.97 23.06 43.80 32.11 36.89 12.96%
NEE 112.00 164.22 209.07 148.05 158.34 278.88 43.22%
PPL 33.20 25.62 19.67 36.90 28.85 27.65 -4.33%
SO 51.20 44.99 39.85 49.80 46.46 52.20 11.00%
XEL 34.40 42.68 45.40 44.55 41.76 68.63 39.16%
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I am long BKH, DUK, ED, EXC, PPL and SO. I initially had a few shares of BKH bought in April or May of this year (in single digits share count). Now I added a small quantity of BKH in the $54.50 range to call that my initial lot. I plan to add more of BKH at the $52.50, $50 and $48 levels in stages. I believe, if the current trend continues in the next week, more chances to buy at next lower levels will surface. I look forward to it. Considering the SA articles’ processing time, I have submitted this article a few days ahead so that readers can benefit. While the target buy prices are a pure attempt with available data without a bias, one should use caution and do their own due diligence.

I have added BKH this week at $54.50 range. I will add more at $52.50 range, and if I do so, I might exit the higher-priced longs at an appropriate level later on. The appropriate level depends on the holding period and a fair expected return, besides addressing my cash needs for alternate buys. I intend to remain net long in BKH in My Perennial Income Portfolio, which you can read here.

At this juncture, it will be appropriate to add a clip from BKH’s 2019 Annual Report which shows some specific company data in a nutshell.

(Source: BKH Annual Report, 2019)

I also notice recent insider buying activity in BKH, as shown in the table below.

Insider Trading Relation Date Trans- action Cost #Shares Value ($) #Shares Total SEC Form 4
Mills Steven Richard Director Aug 26 Buy 54.63 5,000 273,156 18,127 Aug 27 5:45 PM
Kinzley Richard Sr. VP & CFO Aug 25 Buy 56.22 1,000 56,216 4,739 Aug 27 5:46 PM

This further confirms my view that BKH is attractively priced at its current market price of around $54-56.

Thanks for passing by, and if you like my article and would like to read more such articles, you can add me to your followers list.

Disclosure: I am/we are long BKH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a recommendation to buy or sell. Always, perform your own due diligence. Check the company’s history, business model, future prospects, financial situation, valuation, dividend records and whatever to align it with your investment goals. The primary intention is to help investors make better decisions.



Via SeekingAlpha.com