Vectren and Otter Tail good growth utilities
October 22, 2012 7:24PM
Updated: November 24, 2012 6:10AM
Dear Mr. Berko: I have a $14,000 certificate of deposit that just came due. Now I’d like to make at least 4 percent income with safety and some growth. So I’m looking at a utility called Vectren Corp. My broker says it’s a good stock and recommends a long-term purchase. I’d like to invest this $14,000 for the long term and keep my risks low. But if you have any other suggestions, my broker and I would be receptive to any utility investments you care to suggest.
— FF, Indianapolis
Dear FF: Just for grins and giggles, I called a fellow I’ve known for years who helps Franklin Templeton manage one of its mutual fund portfolios and asked him what he thinks of Vectren (VVC-$28.32). His response was, “Who?” I had to repeat the name and then spell it, and he still couldn’t pluck it from his memory bank. But he quickly recognized Southern Indiana Gas & Electric Co., as well as Indiana Gas & Electric, the two companies that merged to form Vectren Corp. in Evansville, Ind. And I heard his hand smacking his forehead as he exclaimed, “Ahch, now I remember!”
Anyhow, I can’t imagine from what dark place management reached to pull out this absurd name. I suspect the board members chose this name while relaxing in a sauna with a case of Cutty and some morphine chasers at the Evansville Country Club. Fortunately, this cockamamie moniker doesn’t equally reflect on the quality of the company.
VVC provides electricity and natural gas to 1.2 million residents in the Hoosier State and expects revenues to grow 4 percent annually, from $2.3 billion this year to $2.8 billion by 2017. Then earnings could grow 5 percent annually, from $1.85 this year to $2.30 by 2017, thanks to higher base rates and good cost controls. Finally, VVC’s $1.40 dividend, yielding 4.9 percent, which has increased very modestly each year since 1988, could reach $1.60 five years hence. Good numbers and a good utility. VVC’s infrastructure services — whose businesses are pipeline repairs and hydrostatic pump, compression terminal and testing station construction — should continue to be strong as many pipeline operators begin to replace aging infrastructure. VVC has good management, a good balance sheet and a good income statement, and it’s what I would call a good growth utility. However, don’t invest it all; just invest $7,000 and buy 300 shares.
A name I do like is Otter Tail Corp. Otter’s (OTTR-$23) shares crashed from $46 to $15 in 2008, as did earnings. And neither has recovered since. More than 42 percent of OTTR’s revenues derive from North Dakota, which, because of its huge shale deposits, is in the middle of an exciting oil and gas energy boom. And 49 percent of OTTR’s revenues are generated from Minnesota, one of two states that have significant deposits of monocrystalline sand, which is used in fracking. This sand is fine-grained silica that is pressure-pumped into shale deposits, and it forces oil and gas deposits to the surface. Southeastern Minnesota also is experiencing the benefits of this sector expansion. Some observers believe this energy boom could grow OTTR’s earnings by 7 percent, to 9 percent annually over the foreseeable future, from $1.10 this year to $1.90 by 2017. OTTR’s $1.19 dividend, yielding 5.3 percent, hasn’t been covered by earnings since 2008 and derives mostly from cash flow. So as earnings continue to grow, thanks to the energy boom, Otter’s dividend might move to the $1.30 to $1.35 level in the near future. In fact, utility aficionados think that 2013 and years beyond represent an exciting future, as 2012’s $1.2 billion in revenues could zoom 50 percent in the next few years. Growth utilities are rare, and OTTR has the look of an uncommonly good growth utility. There are only 42 million shares outstanding, and OTTR might easily move to the high $30s or low $40 by 2016-17. So with your remaining $7,000, buy 350 shares of OTTR.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.