If you are looking for a stock to lock away for a long time and feel assured it will pay off like a nice, fat bond, then gas utility companies may fit the bill for you. I have three that are at the top of their game, and still have room to grow.
DUET Group (ASX: DUE), the regulated energy utility infrastructure owner and operator, has signed an agreement with Fortescue Metals Group Limited (ASX: FMG) to build a pipeline from its Dampier Bunbury natural gas pipeline to a power station near Fortescue’s Solomon Hub operations 270km away. Fortescue expects to save $20 million annually by switching from diesel fuel to natural gas for its power.
Duet’s portion of the project is estimated to cost about $100 million, and Monadelphous Group Limited (ASX: MND) was awarded a $100 million contract for the pipeline construction. It is expected the project, to be completed by December 2014, will have an ungeared internal rate of return of 10.3%.
The company raised its NPAT 51.6%, from $54.4 million to $82.7 million, this following a downturn from three years of high earnings in 2009-2011. Interest expenses on its high debt take up a majority of EBIT, but payout ratios of shareholder distributions are reasonable.
Envestra Limited (ASX: ENV) operates regulated monopolies in gas networks for key population centres in VIC, QLD and SA and smaller centres in NSW and NT also. It is involved in managed transmission pipelines and distribution networks, and owns 22,500km of natural gas distribution and 1,120km of transmission lines.
Its largest shareholder, APA Group (ASX: APA), has an arrangement with the company to buy the remaining shares it doesn’t already own in a deal which has the approval of Envestra’s board, yet still needs shareholder approval. The price has been set at $1.17 for either an all-cash or cash and scrip purchase.
If the arrangement with Envestra is successful, APA Group will be the second-largest listed utility company after AGL Energy Ltd (ASX: AGK). The combined market capitalisation of $7.27 billion for the two, will be much closer to AGL’s $8.47 billion.
APA has had an uninterrupted climb in earnings over the past 10 years, and in the past three NPAT rose from $100.5 million to $175.9 million. Its 26 PE is at the high end of its historical averages, but analyst forecasts have a median rise in EPS of 43% over the next two years.
Utility companies may not be exciting for investors, but you can always console yourself with the strong returns you generate from them. Usually the boring industries are ones where investors really get ahead by. They don’t have much competition, sometimes are regulated monopolies, and a high cost of entry makes great protective “moats” for successful companies.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.