Usually when people think about utility companies, images of old, boring companies that never change may come to mind. They don’t excite investors with new products, or suddenly rocket up in share price like an internet company.
But wise investors know that they have a place in portfolios. More established utilities stocks can offer steady dividend income and long-term growth potential.
Some utilities stocks are investment funds that buy into utility company income streams without having to develop brand new infrastructure, saving on initial investments of capital and time for regulatory approval.
Then, there are newer utilities companies that supply specific needs as energy demands change. These can offer growth opportunities as they scale up.
Here I have three utilities stocks that could give your portfolio some of that income stability.
Spark Infrastructure Group (ASX: SKI) has investments in regulated electricity distribution businesses in SA and Victoria. This infrastructure fund has secure and stable revenue from its monopoly assets through distributors such as CitiPower and Powercor in Victoria and ETSA in SA.
In the last three years, underlying net profit is trending up and dividends have been stable with payout ratios between 80% and 101%. The dividend yield is 6.2% and the PE is 16.1.
The company guidance for FY2014 is for distributions to rise from 11 cents per security to 11.5 cps for expected growth remaining at 3%-5% per annum to 2015.
ERM Power Ltd (ASX: EPW) has businesses in power generation, electricity sales and gas exploration. Revenue has almost tripled since 2011 and underlying net profit more than doubled in the same period.
The company is expecting to deliver stronger results in the second half of FY2014. It achieved record sales in NSW and Victoria in the first half and has expanded its electricity services to small business customers. It is now the fourth largest seller of electricity in the National Electricity Market.
Its dividend yield is 6.0% and its PE is 13.9. The share price is down from a peak of about $3 in October last year to $1.86 currently. In March, the stock was added to the S&P ASX 300 Index (ASX: ^XKO).
Power generation and project developer Pacific Energy Corporation (ASX: PEA) operates two main businesses, the Victorian Hydro Generation and Kalgoorlie Power Systems, yet has a nationwide footprint. Its business focus is on developing and maintaining mine site and renewable energy power stations.
Since 2010, revenue has doubled and in 2013 it achieved a $15.9 million underlying net profit on revenue of $43.6 million. Its interim result was a 27% increase in adjusted net profit of $8.3 million.
In the last three months, the share price is up about 29% to $0.50. It has a 3.1% dividend yield and a 10.6 PE.
Many times investors look to utilities for stable dividend income, but newer companies like ERM Power and Pacific Energy are still in growing phases, so there is the opportunity of asset and earnings growth in their businesses which could drive share prices further in the short to mid-term.