3 growing utilities to boost your returns

Stable dividends and earnings growth make them attractive.

a woman

Utilities can be a great way to add stability to a portfolio because of the steady earnings and dividends. When utility companies show strong growth in business and profits, that is even all the more reason to consider them. Here are three that have shown that growth.

AGL Energy (ASX: AGK) is involved in power generation, selling it to wholesale and retail customers, and investing in oil and gas development to secure its energy generating fuel supplies. With a share price of around $15.50, it is close to its book value per share of $13.24, so there is no great premium priced in to purchasing shares.

In 2013, earnings before interest and tax surged strongly, but despite a larger than average abnormal charge, net profits more than tripled compared to last year, and were more in line with 2011 earnings. Dividend yield was 4.1%.

Just this month it completed its takeover of the energy retailer Australian Power and Gas Company announced in July after taking a 19.9% stake in the company. This will add customers to the retail power business in VIC, NSW and QLD. It has a return on equity of 9.24%, and gross gearing is at a manageable 42.3%. Analyst forecasts are indicating flat earnings growth over the next couple years before it resumes its trend upwards.

If you are looking to invest in utilities, yet aren’t sure which, then Spark Infrastructure (ASX: SKI) may be the answer. It is an infrastructure fund that invests in utilities for gas and electricity that supply markets in SA and VIC. Net profit has been smoothly increasing with annual average earnings growth of about 18% over the last three years. Dividends are steady, and the company is currently offering a 6.2% dividend yield.

Because it’s a fund, it doesn’t have large ongoing costs for plant and equipment, so most of its earnings can be paid out to shareholders. Both return on equity and return on assets have been growing over the past several years, and are above 10%. It doesn’t have excessive debt, and is paying down its loans regularly while still reporting higher net profits.

For more of a pure play in energy, Envestra (ASX: ENV) provides natural gas to retailers by way of the pipelines and distribution networks that it owns and manages. Earnings have risen from $37 million to $107.8 million since 2010, and similarly its share price has climbed from $0.50 to $1.09 during the same time. It is paying a 5.69% dividend for the year.

It has a high net profit margin of 21.26%, and its annual earnings per share growth over the past three years is 34.7%. However, its gross gearing is incredibly high at 240.3% due to ongoing investments it has made in plant, property and equipment. Its total debt has been rising for a number of year, but in 2013 it has begun to pay it down.

As debt levels and their associated interest expenses decrease, more money will be left over as earnings. Now that earlier investments are beginning to pay off, earnings will benefit, and they will have less need of equities issues to supply funds.

Foolish takeaway

Many times people think of utility companies are boring, but earnings from them can be anything but. Their licencing structures and large barriers to entry for competitors can give them monopolistic-like qualities that provide stable business and earnings. When steady earnings are combined with growing profits, you get a mix of good dividend and attractive share price growth.

Think about your total return and find out about companies with good dividends. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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