Market Overview

6 Undervalued Utility Stocks for the Beginning of 2013

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Utility stocks didn’t rally in 2003 when then-President George W. Bush cut dividend taxes.

Logically, utility stocks shouldn’t sell off on the possibility of a dividend tax increase.

In the near term, however, the stock market is an emotional--as opposed to a rational--creature. And only a December deal on the federal budget will save utility stocks from just their seventh losing fourth quarter since 1969.

Fortunately, as long as dividend-paying companies stay solid as businesses their stocks will recover. That’s what happened in the aftermath of the 2008-09 crash, the worst shellacking in 80 years.

And recovery came even faster following the 2010 Flash Crash, the 2011 Debt Ceiling Crisis and this spring, when worries about global growth surfaced.

This rule also applies when individual stocks get caught in selling momentum for perceived weaknesses. So long as the company can maintain its dividend and business plan, recovery is only a matter of time.

AES Corp (NYSE: AES), Atlantic Power Corp (TSX: ATP, NYSE: AT) and Entergy Corp (NYSE: ETR), like Exelon Corp (NYSE: EXC), have been walloped due to weak wholesale power prices and worries a recession would depress margins still further. Each, however, has far less direct exposure than Exelon.

AES’ Ohio unit saw its credit rating cut to junk due to the struggles of its mostly coal-fired power plant fleet. Any negative impact, however, will be more than offset by robust growth in renewable energy and in Latin America, which accounts for 72 percent of revenue.

CEO Andres Gluski, meanwhile, confirmed during the company’s third-quarter conference call that Brazil’s proposed rate cuts “are not expected to have any significant impact” on profits in that country, as its long-term concession doesn’t expire until 2029.

Atlantic Power’s selloff came after management warned it would have to replace revenue from two Florida power plants next summer when contracts expire.

Soon after, however, it took a big step in that direction with the acquisition of 150 megawatts of operating wind power under 20-year-plus contracts and 1,000 megawatts of wind and solar under development.

Management has also affirmed dividend security, though we’ll likely have to see more growth before the payout is raised again.

Entergy stock has sold off since the Nov. 6 election, most likely on tax fears that will reverse when a budget deal is in place.

Meanwhile, investors have ignored some very good news on the regulatory front, including approval for combining the company’s transmission system into a regional transmission operator. That’s the first step in a spinoff to ITC Holdings Corp (NYSE: ITC) that could net Entergy owners as much as $12 a share.

 

Third-quarter profit covered distributions at Consolidated Communications Holdings Inc (NSDQ: CNSL) and Windstream Corp (NYSE: WIN) comfortably. But selling momentum among smaller telecoms picked up nonetheless after Alaska Communications Systems Group Inc (NSDQ: ALSK) eliminated its dividend.

Someday investors will recognize these broadband companies’ vast differences from their failing peers. Until then massive dividends are ample compensation for riding out the volatility.

The bottom line is I’ll be sticking with these undervalued companies, both for big dividends and capital gains, so long as they continue demonstrating business strength in their numbers. For 5 more of my favorite high-yield utilities, see my free report.

This article was written by Roger Conrad.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas

 

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