The Motley Fool

Pocket these 2 utilities companies now to power future returns

Two utility companies are in the midst of acquiring businesses that could substantially grow their own business. Over the long-term, this could make them stronger investments for shareholders who look for steady dividend income that utility companies are usually known for.

AGL Energy Ltd (ASX: AGK) is an integrated utilities company with retail and business energy supply, it also has its own energy resource production business and energy generation. It is developing LNG resources in preparation for the exportation business starting next year.

It is still in the running for acquiring the Macquarie Generation power plant assets that the NSW state government is selling. The ACCC has initially knocked back its offer due to concerns about industry competitiveness, but the company is appealing the decision. The two power plants supply about 27% of the state’s electricity.

It more than doubled its revenue in FY2013 and returned to net profit levels more in line with previous years. The company guidance for full year FY2014 is for underlying net profit around $560 million – $610 million, down from the $678 million in FY2013, yet more than the annual results before then.

Operator and manager of gas distribution and transmission networks APA Group (ASX: APA) is moving forward with its takeover offer for Envestra Limited (ASX: ENV), which is still subject to a vote among Envestra’s shareholders. If successful, APA will take control of an extensive gas pipeline network that it currently manages for Envestra.

Its PE is 27.2 and the dividend yield is 5.5%. When the LNG export industry begins within the next year, it will be able to move gas to both the eastern states and to LNG processing plants in QLD. That will provide more business and income for the company.

Foolish takeaway

Both companies are attempting to consolidate their industry positions. Because of the natural and legal barriers of entry for competitors in utilities, they can’t pass up the opportunities. Success could be a major plus for investors.

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

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