After my recent sale of my shares of Exxon Mobil Corporation (XOM), I decided to put that capital to work for me in my recent purchases. I was thinking about letting the capital sit in a cash position, as the market is not showing a lot of value at these levels. What I try to do, however, is not look at the market as a whole and instead look at individual equities and whether there is any value there on case by case basis. I especially like individual securities that have underperformed the market by a large margin, usually in a sector that has also underperformed the market as a whole. That leads me to the utilities sector.
The utilities sector is up 3.74% YTD, vastly under-performing the S&P 500 which is up 8.75%. The utilities sector is so far the weakest sector in 2012, which should come as no surprise after the monster run it had in 2011. In this individual sector there are securities which have shown even further weakness than the sector as a whole. I decided to put my capital from my XOM sale to work with two utilities, which I’ll discuss below.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
For my first buy, I decided to purchase 55 shares of Avista Corp (AVA) on 2/27/12 at $24.84 per share. AVA is a regulated natural gas and electricity which does business in Washington, Idaho and Oregon. More than half of their power is generated through hydroelectricity, which I find particularly interesting and possibly exciting. They produce the rest of their energy through the use of coal, natural gas and wood-fired thermal plants. There is no particular catalyst that’s going to produce a ton of growth, but as a utility I’m primarily looking for capital preservation along with a decent yield. I get both of these with AVA. My entry yield on my purchase is 4.67%, with the safety of a regulated utility that provides services that people need everyday. AVA has a 5-year dividend growth rate of 14.1%, but we can see this slowing. The recent raise from a $0.275 quarterly dividend to a $0.29 quarterly dividend was only a 5.4% increase, which is still nice. I actually just missed this dividend, as it was available to shareholders of record as of close on 2/24/12. AVA is -3.5% YTD, vastly under-performing the S&P 500. Based on the current payout, I will receive $63.80 in yearly dividends from this position.
For my second purchase, I decided to buy 40 shares of UniSource Energy Corp (UNS) on 2/27/12 at $37.24 per share. I made this purchase for the same reason I bought shares with AVA. I’m primarily looking for safety of capital along with a boost in my portfolio’s overall yield. These two purchases provided that for me. UNS is an electric and gas utility that operates in Arizona. I think Arizona is a good spot for an investment in a utility due to the lack of natural disasters that can cause huge capital interruptions and outlays for a utility along with a growing population. UNS is up 2.03% YTD, also well under the performance afforded by the S&P 500. The entry yield on my purchase is 4.61%. The 5-year DGR for UNS is 14.9%, but this another case where we can see the growth slowing. The recent increase, announced today, was only 2.1%, but I do believe the increases in the future will likely be 5-7% as UNS targets a 60-70% payout ratio. I believe UNS is a solid business, but the weak balance sheet does leave a little to be desired as the debt/equity ratio is currently at 2.0. I hope this is something management can work on in the future, which will depend on the rates UNS is able to receive and the population growth they experience. Based on the current payout, I will receive $67.20 in yearly dividends from this position.
I’m fairly happy with my two purchases. I haven’t previously owned any positions with utility companies for a couple reasons. First, they are typically slow growth businesses as they operate in a highly regulated industry. Second, they are extremely capital intensive and asset heavy, which can be a drain on every invested dollar as well as leading to higher debt on the balance sheets. However, they provide a service that people absolutely require for day-to-day life and as such they provide a relative safety of capital. Also, they tend to have higher yields as they tend to return a lot of shareholder money through dividends. It is because of these pros and cons that I will try to target a 5-7% allocation to utilities in the future. I enjoy the higher yield that they can provide my portfolio, but I’m not particularly enamored with the debt loads that utilities carry or the regulation in which they operate. I am comfortable with a modestly small allocation toward this sector.
I now own 25 positions, since selling XOM and investing with AVA and UNS.
I usually include analyst opinions on my purchases, but in this case this case these two utilities are too small in market capitalization for Morningstar to cover.
I’ll update my Freedom Fund in early March to reflect my recent purchases.
What are you buying?
Thanks for reading.