Recent Buy

buyI’m incredibly fortunate to be in a position where I’m able to consistently buy stock in high-quality companies that have track records of reliably and regularly paying and growing dividends.

And I’m taking maximum advantage of that fortunate position by once more deploying capital and buying shares in a fantastic business.

This most recent purchase is a bit unique for me.

And that’s mainly because it’s a utility, an industry I’m not all that enamored with or exposed to – this is just the third utility in the portfolio, although ONE Gas Inc. (OGS) is a very small (almost non-existent) position that’s only there because it was spun off from ONEOK, Inc. (OKE) last year.

However, this utility exudes quality, growth, and potential that is really unlike a lot of other utilities I’ve run across, which is why I became so excited about it. After investigating the company and its financials, I decided to put some hard-earned cash to work over the next few decades.

Let’s take a look!

I purchased 30 shares of ITC Holdings Corp. (ITC) on 7/15/15 for $33.72 per share.

Overview

ITC Holdings Corp. is the largest independent electricity transmission company in the United States.

They own more than 15,000 of high-voltage transmission lines along with supporting facilities across seven states in the Midwest. These seven states are Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma.

After an IPO in 2005, they became a publicly traded company.

Fundamentals

One of the big reasons I don’t particularly like the idea of investing in utilities is what I typically see as poor fundamentals.

In addition, limited growth potential due to being geographically landlocked along with heavy regulation means there’s a cap on potential growth. That’s offset somewhat by monopolized service and captive customers.

However, due to ITC’s unique business model and the markets they serve, the growth over the last decade and growth potential moving forward are both outstanding. And the rest of the fundamentals reflect high quality.

Revenue has increased from $205 million to $1.023 billion from fiscal years 2005 to 2014. That’s a compound annual growth rate of 19.56%. Not only is that incredible in and of itself, but it’s extremely rare for a utility to demonstrate that kind of top-line growth over a long period of time.

That has trickled down into exceptional profit growth: The company’s earnings per share is up from $0.35 to $1.54 over this period, which is a CAGR of 17.89%.

Like many utilities, ITC’s share count has increased over the last decade, denting the EPS growth slightly. However, we’re still looking at really phenomenal numbers here.

S&P Capital IQ believes that EPS will compound at a 10% annual rate over the next three years, which, if that comes to pass, would be a very, very solid result.

Not a household name as a dividend growth stock, this belies their potential – ITC actually sports rather attractive dividend metrics across the board.

First, they’ve increased the dividend for the past 10 consecutive years, which, due to their IPO date, is as long as their track record could possibly be, meaning they started growing the dividend right out of the gate and haven’t stopped since.

The five-year dividend growth rate might not pop out at you since it’s only 7.9%. However, the dividend growth has been moving in the right direction, with the most recent dividend increase being just over 14%. Meanwhile, Morningstar predicts that dividend growth will be solidly in the double digits for the next five years.

A modest payout ratio of only 41.9% combined with that double-digit earnings growth substantiates that prediction.

On dividend growth, the company notes in the 2014 annual report:

Our dividend policy is premised on growing the dividend commensurately with earnings growth, to the benefit of our total shareholder return proposition.

The yield is, however, one of the drawbacks here, indicating that this is a Stage 3 stock. Yielding only 1.93%, one has to count on that double-digit dividend growth coming to fruition to present a compelling case of attractive total long-term income along with appealing total returns. The company should be announcing another dividend increase within weeks, so I’m excited to see how that plays out.

As probably expected, the company does have a leveraged balance sheet. A long-term debt/equity ratio of 2.35 and an interest coverage ratio of just over 3 aren’t great in absolute terms, but aren’t particularly worrisome relative to the industry. It’s capital intensive to build out infrastructure and maintain these assets.

Profitability, however, appears to be quite robust. Over the last five years, ITC has averaged net margin of 22.97% and return on equity of 14.50%. Margin is especially impressive, and it’s generally been increasing over the last 10 years.

Qualitative Aspects

Electricity is about as ubiquitous and necessary as it possibly gets. You literally cannot live without it, which is what, on the surface, attracts so many investors to the idea of investing in utilities. A captive customer base that quite literally cannot live without the service is, from an investor’s standpoint, pretty fantastic.

However, one of the major reasons I’m not real excited about major utilities is because I foresee increasing proliferation of cleaner energy sources – especially from solar and wind. Due to government regulation, that means electricity generation from the likes of coal will be far less attractive in the future. And we see this playing out with the shuttering of coal-fired plants occurring across the US.

But ITC owns no generation assets. They focus completely on transmission alone. That means the risk of changing generation doesn’t really impact them as heavily as integrated utilities. This is basically a play on infrastructure, which remains valuable and important (even increasingly so), in my view.

Not only that, but they’re specifically building out new projects (like the Thumb Loop Project) that are designed to carry electricity from far-out wind generation and newer natural gas generation to city centers where the electricity is needed. This “future-proofs” them somewhat, especially relative to some of the major incumbent utilities that have transmission assets based on older generation, like coal.

Continued investment in their network of infrastructure adds to their competitive advantages while also bringing in new customers. A five-year plan, unveiled in 2014, involves the company spending $4.5 billion on investments, which should allow them to effectively and efficiently compete for years to come.

The company’s scale is a competitive advantage as well, backed by regulation. The Federal Energy Regulatory Commission will only permit additional transmission lines if there is a demonstrated source of demand, but with ITC already competing effectively (and essentially alone) in their areas, and combined with their history of successful investment, they’re heavily entrenched in the Upper Midwest. Meanwhile, the company is also remaining open to expanding beyond this area, including internationally.

That positive regulation relationship extends to the rates that ITC can charge. To spur investment in infrastructure and transmission, incentive-based rate treatments exist by the FERC, allowing a transmission company like ITC to benefit fully.

I see this favorable environment playing out in their growth and profitability, leading me to believe that this is one of the best possible investments that exist in the Utilities sector.

Risks

While ITC faces essentially no competition across each of their MISO regulated operating subsidiaries (since they operate as the primary transmission service in their respective areas), competition could increase in the future, especially as a result of Order 1000, which amends certain planning and cost requirements.

Traditional integrated utilities could choose to build out their own transmission networks, which could add to the competitive environment, limiting returns and investment opportunities for ITC.

Like most utilities, ITC carries fairly significant debt on their balance sheet. Rising interest rates could constrain growth in the future.

An increase in solar power generation at the point of consumption could limit demand for transmission in the future.

Valuation

The stock’s P/E ratio is 21.75, which compares favorably to the five-year average of 22.5. And, unlike a lot of other utilities out there, I don’t think ITC’s P/E ratio has been unfavorably skewed due to the flight to income. So I think this is an apt comparison, relatively speaking, and also a very reasonable P/E ratio when looking at the growth. Many stocks growing at much slower rates require investors to pay even more than $22 for every $1 of profit.

I valued shares using a two-stage dividend discount model analysis with a 10% discount rate. I then assumed an initial dividend growth rate of 13% for the first ten years, with a terminal rate of 7%. The initial dividend growth rate is in line with recent raises and the forecast moving forward, while also factoring in the modest payout ratio. All in all, I think a mild margin of safety is there in the assumptions. The DDM analysis gives me a fair value of $37.90.

Pretty much every valuation metric you can look at (price/book, price/sales, yield, etc.) is currently lower than the five-year average, even though the company is showing no signs of slowing. The stock is down about 18% since the start of the year, which I think is presenting a long-term opportunity here. The stock appears at least 10% undervalued to me; an argument could be made it’s closer to 15% undervalued, or more. Either way, a margin of safety appears to be present in today’s valuation.

Conclusion

I don’t invest in utilities lightly or often, as I already discussed. But I think the focus on transmission and clean energy really makes a lot of sense here. Infrastructure investment is so necessary and infrastructure itself is so valued that ITC is able to garner favorable returns on its investments that exceed traditional utilities. Combined with the fact that this company doesn’t need to worry about bringing generation into the 21st century, and I like their chances.

The fundamentals across the board aren’t just outstanding for a utility, they’re outstanding for any company operating any business model. If there’s a utility that’s growing this fast and trading at a cheaper price – and one that will likely increase its dividend at a double-digit rate moving forward – I’m not aware of it.

The yield isn’t up to par with some other utilities out there, but the dividend growth, total returns, and overall quality far exceed most, if not all, I’ve ever come across. Overall, I’m very happy with this investment here and excited to see how the next decade or two pans out.

This purchase adds $19.50 to my annual dividend income, based on the current $0.165 quarterly dividend.

I’m going to include current valuation opinions from other analysts below, which I use to concentrate my reasonable valuation estimate:

Morningstar rates ITC as a 5/5 star valuation, with a fair value estimate of $42.00.

S&P Capital IQ rates ITC as a 4/5 star “buy”, with a fair value calculation of $36.60.

I’ll update my Freedom Fund in early August to reflect this recent purchase.

Full Disclosure: Long OGS, OKE, and ITC.

Ever look at ITC? Like what you see? Think this is an interesting opportunity here? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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84 Comments

  1. From what you’ve said, it looks like it could be a good purchase on paper, it’ll be interesting to see if they can maintain growth and continue raising dividend payouts in the next decade or so. I’m looking forward to your July roundup – you’ve managed to deploy lots of capital again this month! Your snowball is definitely on a roll, so to speak 🙂

  2. Mantra,

    I about fell off my couch when I saw you bought a utility stock haha That’s not your style. However, as you mentioned, it seems like this is a solid utility stock that is different than the rest of the pack. I like your thought process here and management’s commitment to growing their dividend. I am a bit surprised by the yield considering the fact it is a utility, but if they are different than the pack than you can’t expect a utility in line with others in the industry. The yield is still comparable with the S&P and has a solid dividend growth rate, so you can’t complain too much.

    Once again, great job going outside of the box here and way to add yet another great dividend paying stock to your portfolio! Keep up the great work.

    Bert

  3. Nicola,

    We’ll see how it goes, but I like their chances. 🙂

    Appreciate all the support. Excited for another update. I’m so fortunate to be having a great year. Looks like things are going very well for you over there, too. Keep it up!

    Cheers.

  4. Bert,

    Ha! Yeah, I’m definitely not a fan of utilities. I see a few out there that are well-run enterprises, but I also see a lot of them that are bloated and run poorly. I think some investors ignore that just to snag that yield, but that’s just not my thing. I’m after high-quality companies.

    The dividend growth should be outstanding over the foreseeable future. If they can grow that dividend well into the double digits, shareholders should do well. And this infrastructure should remain valuable for decades to come. Very excited!

    Thanks for dropping by. Hope all is well up in Cleveland. 🙂

    Best regards.

  5. The buys keep coming. The way it should be. Usually the buys made among our U.S. community are pretty well known. I have to say I never came across ITC and welcome the introduction to a new potential stock for my own portfolio. One of the benefits of being transparent and sharing. Thanks for sharing this new buy. Time for me to dig into it.

  6. DH,

    I’m really fortunate to keep purchasing stocks. This is far from the norm for me – my long-term average is something like half this recent activity. But I’ll take it when I can get it. 🙂

    Glad you found a new idea here. It’s unlike a lot of other utilities out there, which is one reason I like it so much.

    Thanks for stopping by!

    Cheers.

  7. I researched ITC couple years back, but I don’t hold stock in it due to having low yield in utility sector. Its a good company, but dividend grow by only 1 cent every year (except last year). It will be a good defensive holding, and I am almost sure that you will have good capital gain on it due to both fundamental and chart.

  8. Interesting purchase, Jason. It’s great you’ve been able to keep an open mind still and go outside of your comfort zone to find more value for your portfolio.

    I’ve never heard of the company before but I like the story. Seems like an infrastructure play with some good opportunities for growth.

  9. AJ,

    The low yield might throw off some people. But if I ignored low-yield stocks, I wouldn’t have the likes of DIS, GD, and V in the portfolio. And I certainly don’t regret that. If I were much older, though, yield would be much more important to my needs. However, I have to think about sustainable and growing income over the next few decades.

    And I wouldn’t recommend looking at dividend raises in terms of cents. It’s all relative to percentages. A $0.01 raise on an $0.11 dividend is a lot different than a $0.01 raise on a $0.25 dividend. The percentage increases are pretty solid, relative to that.

    Thanks for stopping by! 🙂

    Cheers.

  10. RTR,

    At the core of it, I love the idea of utilities. So it’s not a stretch for me. It’s just that many utilities sport poor fundamentals. In a world of changing energy, that complacency can come back to haunt companies. I prefer to invest in forward-thinking businesses, and this is about as good as I can find there.

    We’ll see how it goes, though. Time will tell. 🙂

    Thanks for the support!

    Best wishes.

  11. Congrats on an awesome find! I’m so grateful you brought this company to my attention on Twitter, I’m going to hop aboard very soon. I don’t own a utility yet and I love that ITC doesn’t act like one at all. I really like the electrical transmission pure play aspect. Management seems great too, love their plans and goals over the next few years. I’m thinking the dividend continues recent double digit increases or even better after bringing the payout ratio down so dramatically over the last decade. This was a great write-up, thank you for sharing!

  12. Ryan,

    Thanks so much. The more I looked at it, the more I liked it. 🙂

    Would love to have you on board. Very excited about the next five to ten years. Beyond that, anything is possible, but I do like their chances. Their investments in transmission infrastructure have been paying off handsomely over the last 10 years, and they’re just getting warmed up. It’s still a pretty small company. Lots of potential.

    Thanks for dropping by!

    Best regards.

  13. Interesting purchase. The com pany is intriguing because it sounds like they’re n electricity “pipeline” company. So it’s a toll road type company which I tend to like. Definitely looks good on surface and you make a really compelling case for them for investment. Like you I’m not a big fan of utilities because theres so much regulation, generally limited growth opportunities, and potential energy generation disruption in the future. But ITC does seem better positioned to do well even if the generation source changes. Any expansion plans to the plains states (wind) or the southwest (solar)?

  14. JC,

    Indeed. That’s basically what this is. And favorable rates make it a compelling opportunity. 🙂

    They mention expansion plans, but no specific areas (as far as I’m aware) beyond the current projects. They seem to be pretty conservative there, which I like. I’m sure they’ll expand as long as investment looks ripe.

    Thanks for stopping in!

    Cheers.

  15. Jason,

    I am amazed how cash you are able to turn in dividend. I have one question now, I am following you since a long time and you are always investing small amount of cash. Are you not interesting to invest let say 10k or more?

    Cheers,

    RA50

  16. RA50,

    I’m super fortunate. This activity is beyond my long-term norm, which I’m so excited about. Not sure how long it’ll last, but I’ll continue to put capital to work when I can.

    As far as investing $10k at a time, it’s unnecessary. I’m not sure if your commission fees are a lot higher over there, but they’re reasonable over here. I find 0.5% during the accumulation phase as pretty attractive, especially knowing that I’ll pay little (if any) commission fees once I’m living off of my passive income. I’d much rather invest more often and diversify my capital out. Investing $10k at a time would severely limit my opportunities there, and very likely not lower my costs enough to offset the drawbacks. I’d be buying maybe two or three stocks per year, which would not be in line with a lot of my goals. In the future, it’s even more likely that investing less will be possible at the same (or lower) cost structure. We’ll see how these fee-free brokerages do over the next few years, though.

    Cheers!

  17. Good day Jason
    This looks to be a great buy for your freedom fund. OKE will give you exposer to another sector. it’s good to have different stocks in different sectors. Congrats on this buy, it will be a solid stock and will reward you with the dividend.
    Cheers

  18. This looks like a very attractive investment. I am also lightly allocated to utilities. Will be giving ITC a closer look although I may “stink bid” it and hope to get lucky.

    I also like SRE and D in the utilities space because they have future potential for growth due to stakes in liquified natural gas export terminals.

  19. michael,

    I didn’t buy OKE here, but rather ITC. Nonetheless, it’s definitely more exposure to the Utilities sector. 🙂

    Appreciate the kind words and support. Hope you’re having an excellent July as well!

    Take care.

  20. FV,

    I hear you there. I like yield, but not at the expense of quality and fundamentals. And that’s the trade-off you’re forced to make a lot of times with some of those traditional utility plays. This one doesn’t require it, but you also don’t get that high starting yield. Nonetheless, the propositions for total income, income growth, and total return are all quite compelling. We’ll see how it goes over the next few decades. 🙂

    Cheers!

  21. Solid buy, great company…I think you got a nice discount here because no one is exactly sure what ROE the FERC is going to allow going forward. Market hates uncertainty and all that. I bought in a while back (at a much higher price), I really liked how the FERC is encouraging transmission grid upgrades by incentivizing them with much higher allowed returns vs other utilities.

  22. Hi Jason, Just like the big Oil companies will move into renewables when it is feasible economically the utilities such as SO (long SO) are already divesting in solar. I’m not negative long term on Oil companies or Utilities. They have vast engineering resources and will adapt. I’m sure they run through all future scenarios. I’m 48 so I have to think about yield as well 🙂

  23. Randall,

    Indeed. It’ll be interesting to see if the returns allowed moving forward change materially. With the fact that the incentives provided for infrastructure aren’t that old, I think that gravy train will continue to roll for some time. Although, this company could grow much slower and still be a dynamite investment.

    Glad to be a fellow shareholder with you. Definitely not a popular choice, but some of my best investments thus far have been those that fly under the radar.

    Best regards!

  24. jon,

    Oh, I have no doubt that big incumbents will make changes. The variables are how fast and how costly. Both are variables that open up opportunity for smaller, more nimble players. Southern, for instance, has no measurable solar generation, from what I know. It looks like well over 40% of their capacity is from coal, and we know where that’s going. In the meanwhile, they’ve posted almost no growth at all over the last decade, even without thinking about the total decimation of coal yet. Big changes are costly, as we can see from the nuclear cost overruns. That’ll be interesting moving forward. But I think there will be lots of opportunities to invest in companies that can easily adapt to those changes and pay growing dividends along the way – ITC is one. Very exciting times. 🙂

    Thanks for stopping by!

    Best wishes.

  25. Well, I can honestly say that I have not heard about ITC before. Thank you for bringing it to my attention. It seems like a nice stable company with a nice stable growth trend. All things point to good stuff in the future. I especially like the fact that it has fallen quite a bit from its high so you know your getting more for your dollar than just a few short months ago.

    Keep up the great work!

    ADD

  26. Nice purchase, Jason. Like I mentioned on Twitter, when I was sifting through the utilities sector and shortlisting stocks, ITC stood out as one with the lowest yield and fasted expected growth rate.

    Good to see you are warming up to the utilities sector 🙂 I liquidated my ETF and started off with one – will be adding another couple of utilities in the future.

    Best wishes
    R2R

  27. I have considered ITC more times than I can remember, but the low yield always stops me. Of course, you have a lot more time than I do for the dividends to grow. If we see a major correction in the market (or just utilities in particular), I would be inclined to buy if the yield reached 2.5%.
    Long SCG, SO, WEC, XEL

  28. Keep up the good work! You’ve surpassed my own brokerage account value this year by continuing to put your own free cash flow from your online income plus reinvesting your dividends from stocks into great companies. I just want to thank you for your blog and have a quick question regarding Conoco Phillips since you own the stock; Will you continue to hold COP if they cut their dividend? Thanks for all you do!

  29. DM,
    Glad to see this company get some deserved exposure. I opened a position back in February based on exactly what you mention here, its unique business model. The stock is also in my Santa portfolio (lighting Santa’s way). I wanted a utility in my portfolio, but saw this one coming with growth and income instead of just income. Not a bad yield, especially now that it’s pulled back. I bought at higher levels and I’ve considered averaging down a bit here, but I figure I have enough for now and I’m finding value elsewhere.

    One thing you didn’t mention here is that ITC is a Novi, Michigan company. While Michigan really took a beating in the last recession, this company was growing nicely and increased its dividend throughout. Strength in a weak economy, that’s the kind of company I like. If this transition model continues to be a success, there’s a lot more ground for growth. I like it and continue to hold.
    -RBD

  30. ADD,

    It’s great to see a lot of utilities have fallen quite hard. I think some call further, as many were bid up way too high. But ITC didn’t really follow that same pattern due to its low yield. So I think it’s just falling down with the rest of the crowd, which presents a pretty solid opportunity. The valuation seems really attractive here when considering the growth. We’ll see. 🙂

    Thanks for stopping by!

    Cheers.

  31. R2R,

    If there’s a utility out there that’s growing faster and simultaneously cheaper, I’m not aware of it. 🙂

    I’m lukewarm on utilities in general, but especially so on the generators of electricity. I wouldn’t mind some exposure to the water utilities, though I do worry about infrastructure spending when looking out over the long haul. Nonetheless, you have a very captive audience there.

    Happy shopping over there!

    Best regards.

  32. Keith,

    I hear you there. Stocks with yields below 2% would get a pass from me, too, if I were, say, 30 years older. The income proposition probably just wouldn’t be great enough, unless I were already drowning in cash flow (in which case I probably wouldn’t be investing anymore anyway). I’m really fortunate in that I have the opportunity to invest across that spectrum.

    As long as we’re all getting to where we want to be, that’s all that matters. 🙂

    Cheers!

  33. Ryan,

    Thanks so much!

    I may have surpassed you, but all that matters is that you’re on pace for your own goals. Keep that income snowball rolling. 🙂

    As far as COP, I’d continue to hold. I’ve mentioned it a few times now, but it’s my intention moving forward to not sell anything unless something drastic happens to a company (like ARCP). I once heard/read that a portfolio is like a bar of soap; the more you handle it, the less you’ll have of it in the end. I believe that. If COP continues to do what they do, I won’t sell just because the price of oil puts them in a temporary pinch. Just my take.

    Best wishes!

  34. RBD,

    Nice move there! I don’t even remember reading about ITC until just recently. But really impressive stuff once I looked into the fundamentals. And their size indicates plenty of opportunities still yet ahead.

    Yeah, I read about them being based out of Novi and that instantly became interesting to me because I once lived in Novi. Novi’s a bit too much “suburbia” for the Jason of 2015, but it was great for the me of many years ago. Clean, safe city. And close enough to the amenities of metro Detroit without the drawbacks. But I think they’ve done really well throughout the last 10 years simply because their service isn’t really discretionary in nature. That’s probably regardless as to where they’re based. And it appears their ongoing investments really puts them in a great position as far as preventing obsolescence. “Future-proofs” them about as much as possible, I think. 🙂

    Glad to be a fellow shareholder with you here. Very excited to see what that next dividend increase looks like.

    Cheers!

  35. Good purchase, DM! I like utilities like SO and ED as they have consistent dividends, albeit, growing slowly. However, I’ll have to do a little research on ITC. Keep racing towards FI 🙂

  36. R2R,

    I’m doing my best to keep pace. 🙂

    I’ve looked at stocks like SO and ED before and concluded the fundamentals and growth just weren’t there for me. Although, the recent drops in valuation have made them more compelling than at any point over the last couple years. I’d prefer SO over ED, though.

    Keep it rolling!

    Cheers.

  37. Hey Jason, nice to see you broadening your horizons a little with this one! Sounds like a pretty fair price from what you’ve described, doesn’t sounds like a massive margin of safety but certainly doesn’t sounds like overpaying either, which is all you really need to be successful in the long-run!

    Hope that 10 year dividend increase streak continues for many more years!

    Cheers,

    Jason

  38. Jason,

    This one’s definitely outside my usual interests. I mean, I love the idea of investing in utilities, but not so much in practice. This one gives me a lot of the benefits I like with utilities – ubiquitous and necessary service – but without the drawbacks like poor fundamentals and growth. 🙂

    As far as the margin of safety goes, I think it’s there. Depends on what you think the business is worth. If Morningstar is to be believed, the stock is more than 20% undervalued. I happen to think it’s between 10% and 15% undervalued right now. I guess we’ll see.

    Thanks for stopping in. Hope you had a great weekend!

    Best regards.

  39. Hi Jason,

    Really appreciate the content you consistently put out. Prior to this post I hadn’t heard of ITC and took a quick glance on Morningstar. I noticed that FCF for the past 10 years has been negative save one, though their book value has been increasing at a huge clip. This seems to mean they’ve been paying their dividend by taking out more and more debt. Is this concerning at all to you? I’d love to get your perspective on this.

  40. WSO,

    No problem. Happy to share and, hopefully, inspire. 🙂

    As far as your question goes, I’m not concerned about the negative FCF. Poor/routinely negative FCF is actually a knock against most utilities, and one reason I’m not terribly fond of the industry in general. But I have less of a problem with the negative FCF from a small company like ITC that’s rapidly deploying capital than a larger, more established company that should be generating material cash flow and mostly just maintaining a network. Furthermore, they’re generating very attractive returns on that capital (especially relative to a lot of other utilities), so I’m even less bothered by it.

    Hope that helps! In the end, it’s up to each individual investor to determine what aspects of a company’s fundamentals bother or excite them. But that’s my perspective on it.

    Best regards.

  41. A good buy, I think, Jason.

    I know you have a somewhat reserved attitude towards utilities which I fully understand (high capex and thus debt whilst also low growth) but they certainly have a place. Electricity utilities are–as you say–absolutely necessary today and this does give them an advantage.

    For me, I would like to add a little water exposure as they are–for me at least–the ultimate necessity industry. However, they have not been attractively priced over here in the UK for some time. I don’t know what the water industry is like over in the US but for the long-term investor it does seem attractive.

    Keep up the good work!

  42. Nice work with ITC. I’ve been buying small amounts of DUK over the last few months, but I looked seriously at ITC and I still might by some in the future. I bought mainly because I liked the Chowder numbers slightly better for DUK and I had been wanting to add a utility to my portfolio. Next thing you know it you will wind up adding a water company!! 🙂 I recently added MSEX to my dividend war chest as well. 🙂 I guess you could call me a grandpa investor.

    Great work with the dividend growth report. It was very insightful.

  43. Jason,

    ITC is a new one for me, but reading about them as a transmission company gives me reason to really like this buy. Transmission is kind of like the railway of the power companies, and despite the advent of dispersed generation (natural gas, wind, solar, etc.), continues to be important. The fact is power loading goes through odd fluxes depending on time of year and day, and base power along with quick reactions to provide extra generating capacity from one utility to another is always needed. In steps ITC who is there to facilitate, its almost too perfect of a plum spot to be in, but since its here that is a nice place.

    – Gremlin

  44. Actually a fan of utilities here! Nice round out to my growth stocks and evens out the dips when the markets turn south. Interesting to hear about this one, of which I was not familiar. Even in the crisis utilities paid out their dividends and raise them almost every year. Not sure why anyone would choose to buy say a 30 year treasury over a dividend yielder than pays a higher rate and is almost guaranteed to pay more each year!

  45. My mistake on the stock symbol Jason. I worked a 36 hr shift straight and was very tired. ITC is a awesome buy for you.
    Cheers

  46. ITC looks like a nice pick up. A utility with great growth prospects, now that’s an interesting combination. I own companies like ED, SO, and PNY. They’re mostly there as good current income and will become less significant as time goes on. They’re current job in my portfolio is to do the near term lifting while companies like AAPL and AMGN gain some steam.

    I hope ITC works you for ya, I’ll be keeping an eye on it.

  47. Jason,
    Thank you for the information about ITC! If you would compare ITC vs V, of these two companies it would appear that V has a lot more going for it than ITC. Would you agree or not? If you are looking for growth in the future, my money is on V! What is your opinion?
    Thanks,
    Nut501

  48. Jason you’re making me feel bad for not pulling any triggers in July yet!

    Kidding aside, great buy. It’s always great to see someone putting new capital to work hard for them.

  49. TDD,

    I’m with you. I mentioned elsewhere that water utilities is where I’ll likely go next. I still see one or two electric utilities that offer better fundamentals and growth characteristics than the industry as a whole, but that’s not necessarily a great comparison to make. However, some of our best water utilities have been pricey for some time as well. That’s the trade-off between price and quality. But I can definitely see some exposure there. The only thing I’m concerned about is infrastructure spending on aging networks, but that’s just part of the gig.

    Thanks for dropping by!

    Best regards.

  50. Gremlin,

    Indeed. You could think of it that way. They basically offer the pipes for the energy, but I really like the fact that they’re connecting far-off wind generation to the cities that need the electricity. I can definitely see wind and solar becoming a larger part of our energy consumption over the next, say, 30 or 40 years. And they’re really just starting out as a pretty small company. So I wouldn’t mind riding that all the way through. 🙂

    We’ll see how it goes! Thanks for stopping in.

    Best wishes.

  51. JayP,

    Definitely agree with you on treasuries. I’ve heard the description change from risk-free return to return-free risk. And that seems apt to me.

    As far as utilities go, some can and do cut their dividends. Just like with any other industry. But that’s why you try to focus on quality. The problem I find is that many of the major utilities don’t offer up the kind of fundamentals I look for. ITC, however, has that quality I want in spades. 🙂

    Cheers!

  52. Spoonman,

    “They’re current job in my portfolio is to do the near term lifting while companies like AAPL and AMGN gain some steam.”

    Indeed. That’s how I think of my high-yield stocks as well. They get my rocket off the ground while the others will eventually get me into outer space. 🙂

    I think anyone – even someone young – probably needs some mixture of them, and especially so if your asset accumulation phase is quite short and you’re interested in living off of dividend income rather early in life. So I favor a higher yield, all else being equal. Unfortunately, all else is never really equal. So you just have to kind of balance all of that out.

    Best wishes!

  53. Nut501,

    I don’t know why you would compare V to ITC. They’re totally different companies in totally different industries. If I had to bet which one grows faster over the next decade, my bet is on V. But ITC is significantly cheaper with a much higher yield. Apples and oranges.

    Take care!

  54. Tawcan,

    Hey, you can sit still for another year or two and I probably still wouldn’t catch up! 🙂

    I’m sure you’ll be back at it soon, though.

    Thanks for stopping by.

    Cheers!

  55. True, you have to do your homework. But, having been through the whole financial crisis, none of mine ever were cut. The heavy regulation is a dual edged sword – limited growth but limited downside. I had more dividend cuts in financials like GE.

  56. Hi DM,

    I am FinancialShill, I mean FinancialSamurai and I think you should’ve invested your money in growth stocks like TSLA because even though they are not profitable they are good because they are good. Companies don’t need to make money, they need to have share price gain because capital gain is how you retire baby! And also, buy a nice house because it will make you happy and look good and the huge debt is worth it because it is worth it. Also, MOTIF investing because I am paid to advertise it and don’t feel like giving reasons because I get paid either way.

    Nah I’m just playing with you, ITC is an interesting find- a utility with plenty of growth opportunity and fast growing dividend. They are taking on mostly debt to finance their investment activities but it’s not even an issue because the dividends paid are not a large burden, probably not for many years. This makes it easier for ITC to build up that asset and revenue base while paying you more overtime.

    Best Regards

  57. Arthur,

    I’m guessing you don’t care for Sam’s site? Can’t say I disagree with you. Maybe there’s some good advice in there if you live in Silicon Valley and make $300,000 per year. For the rest of us…

    We’ll see how it goes with ITC. Definitely not often I get excited when looking at a utility, so I just had to plunk down some cash and see where this thing goes. If the next 10 years of top-line and bottom-line growth are even half as good as the last 10, I’ll be pretty happy. But I think they can do a lot better than that. 🙂

    Cheers!

  58. Hi, and thanks for letting us take part of your great adventure.

    I have three questions, which I cannot see that you have answered earlier:

    1. Earlier you mentioned that around 50 stocks would be a fair number in your portfolio. Currently you are above 60…any thoughts on that? Plans for any sell offs later…or just gonna keep finding those great bargains?

    2. Do you plan to have all shares at an equal level? For exampel 10k in all of your purchases? Or a certain percentage for each sector?

    3. Any thoughts on oil/nat.gas shares? Your portfolio consists of a quite few of them…and the prices is just getting lower and lower? Wait and see? Or smile and buy?

    Best regards

  59. SwedishDaniel,

    Thanks for stopping by!

    You’re right in that I’ve already answered these questions. But I’ll go ahead and direct you.

    For the first question, the answer is that I’m not artificially or arbitrarily limiting myself to any specific number. There are still a lot of high-quality stocks out there I don’t yet own but would like to. I see no reason why one needs to cap themselves. Moreover, I don’t find it particularly time consuming to manage a large portfolio. But the right number of stocks is really an individual call. Go with what works for you:

    https://www.dividendmantra.com/2014/11/is-managing-a-large-dividend-growth-stock-portfolio-time-consuming/

    As for questions two and three, I have rough sector allocations that I’m somewhat sticking to. Although, that changes as the portfolio grows. It’s organic and dynamic. I’m heavy on energy, so I’ve been scaling back there rather significantly over the last six months or so. I’ll probably dabble, but that’s about it. Keep in mind as well that many other companies in different sectors have exposure to energy. So you might not be able to totally escape that exposure, but you can also grab deals elsewhere:

    https://www.dividendmantra.com/2015/05/sector-allocation-as-it-pertains-to-dividend-growth-investing/

    Cheers!

  60. Well, great buy!
    Today I tried to buy Caterpillar but in the end I have not decided. Maybe tomorrow down 75…

    Off.topic: what do you think to take position in gold stocks like NEM, ABX, GG o GOLD. Maybe in the future we could have great earnings.

    Cheers from Spain

  61. Javier,

    I’m loving the recent volatility around CAT. I may average down on that one in August. Although, I don’t plan on it being a very large position for me.

    Not a big fan of gold stocks or gold. There’s little value to society from gold and I’m not sure how you accurately value something like that. Precious metals just aren’t my forte.

    Thanks for stopping in!

    Best regards.

  62. Very interesting entry. I know the traditional utility model of generation and transmission, but this one seems interesting in that it focuses somewhat on the transmission aspect.

    With the exception of solar and high density batteries, it’s tough to see how cetrally distributed power will be out of date in the near 1-2 decades. Nothing lasts forever, but I’ll take the odds here.

    Definitely one to add to the list. It sure has been an interesting few months. Energy is finally down to levels not seen in some time, and yields on a handful of names are quite tempting. I just initiated COP as it’s one that was on my watchlist for a while, but the valuation/yield just never made sense. Well I turned my back and came around, and all of a sudden it’s in the low 50s with a 5.5% yield! It may go lower, but it’s a risk I’m willing to take. CAT is also shooting up close to 4%. These names are a pain every few years, but so long as they can maintain a breakeven in lean times, their cycles can still prove to be very profitable.

    Very sad for me to see myself down quite a bit in some names, but happy to have the chance to round out my portfolio in other stocks at better prices. At the end of the day, some buys will be better than others, but I don’t have to win them all.

    Btw, I broke my valuation rules for the 2nd time late 2014 with SBUX at pre split 81, and it’s just been a rocket ahead! I don’t plan to sell any time soon as it’s not becoming an outsized position, but certainly one to watch carefully. Hopefully I’ll have the opportunity in coming years to add to some more decent quality higher growth stocks.

  63. Ravi,

    Nice move there on SBUX. That’s definitely one I regret passing on. Of course, there’s a whole bucket of stocks like that – MMM, CL, BDX, etc. Just can’t win them all. That’s kind of why I’m amazed that some investors want to limit themselves to just 20 or 30 stocks. There are way too high-quality stocks out there, in my view.

    I’m with you on the volatility. Very, very happy to see the boat start to rock a little bit. Hoping it’s just a preview for more to come. Should have some more BBs for the BB gun come early August, so I’ll be ready to go hunting. 🙂

    Keep it up over there!

    Cheers.

  64. Jason
    I’m not familiar with ITC and I don’t want to second guess where you invested your hard earned cash but I may have looked at BHK, POR, WEC or WEC. IMHO they are very well run electric utilities in expanding areas of the country. I also like what Warren did. Buy a whole utility and watch the cash roll in. Of course, you have yo have several billions of dollars to do that.

  65. Brent,

    Ha! Yeah, if I had enough money to buy a utility outright, I’d be in a slightly different position in life.

    As far as the other utilities go, I like WEC quite a bit. Appears to be rather well run. Looked at POR at some point, but found their lackluster growth extremely disappointing.

    Cheers!

  66. Oops, I goofed on one ticker! I meant to add XEL. They cover MN, CO, ND, TX and more.

  67. Nice purchase there! My problem with many utilities is that they almost always seem to have exposure to fossil fuels, which I think are in their last decades, and can’t be relied upon to fund my retirement (IMO). I bought some Brookfield Renewable (BEP), but this also seems to be a very good opportunity! I think I’ll take a closer look.

  68. YI,

    Absolutely. That’s kind of my problem with most utilities as well. Many of the major players out there like, say, AEP and SO have a lot of coal exposure. That could be a rather significant headwind moving forward.

    But ITC doesn’t need to worry about changes in generation as much. And their new projects are designed to work with renewable sources. I’m pretty excited. 🙂

    Thanks for stopping by!

    Cheers.

  69. Great buy. I like utility stocks. Canadian utilities dividend aristocrats are currently heavily discounted such as Atco, Canadian utilities, Fortis etc… They have been dropping for a while and I doubled all of them up to take advantage on great valuations.

  70. BSR,

    Yeah, the utilities have been dropping over here as well. They ran up quite a bit over the last few years as investors chased yield/income. They’ve been dropping lately, I assume, due to fears over rising rates. Valuations probably have something to do with that as well. Either way, the values are a lot better now than they were over the last couple years or so. ITC has been dropping in kind even though the yield was never that high. And that appears to be an opportunity. We’ll see. 🙂

    Happy shopping over there!!

    Best regards.

  71. Jason,

    Definitely an interesting pick up here. Lower yield than your usual pick up, but you make a strong case. I’m curious … What are you thoughts on CMI? I have been researching their dividend growth and it has been almost astounding

    Guy

  72. My thoughts are as follows:

    Investors are paying a premium to market multiple (22x ttm), and a substantial premium to historical utilities multiple of 15x to purchase future earnings, which may not end up growing at a clip near historical given FERC complaints, and potential lowering by the FERC of allowable ROE in response. Add in the leverage, interest coverage of 3x, and perpetually negative free cash flow, all in the wake of a possible rising rate environment, and you get a situation where paying 22x ttm doesn’t make much sense. If allowable ROE is dropped, debt service will become more important than increasing the dividend.

  73. Guy,

    Fundamentally, CMI is an excellent company. Cyclical, but less so than you’d think. I think the question then just becomes whether or not you really understand engines and want to be invested in a company that specializes in them? I prefer diversified industrial firms where I can spread my bets out. But the quantitative case is strong. It’s just a qualitative case at that point.

    Cheers!

  74. Dan,

    Those are valid concerns. I share some of them.

    I’m not quite sure I follow the cash flow and balance sheet concerns, though. That’s pretty common across the utility space. Of course, that’s partly why I’m not such a fan of the industry in general.

    As for ITC, I think a premium is warranted. It’s growing substantially faster than any other utility out there. If you know of a utility that’s growing faster AND available at a cheaper price, by all means share. But I don’t think it’s fair to compare ITC to a, say, Southern at 18 times earnings when the former is smoking the latter. Even if the FERC changes the game and ITC’s returns going forward are lower, I’m not sure that’s a real big issue. If ITC grows 20% or 30% slower, I think it’s still a solid buy here. Many stocks (especially utilities) are trading at similar multiples and are growing half as fast, or slower. I wouldn’t be unhappy if they can only grow the dividend by 8% or 9% per year over the long haul, though I think they’ll outpace that. Time will tell. 🙂

    Cheers!

  75. Jason-
    I looked ITC a little more closely and realized that is not an integrated utility. What it does do is own the transmission lines that connect the generation to the load. The best I can come up with is that it is similar to KMI or an MLP in the oil/gas industry without having to worry about spills.

  76. Brent,

    Yeah, that’s basically what this is.

    Integrated utilities have their benefits and drawbacks as well, but I think ITC’s risk-reward relationship is stronger.

    Cheers!

  77. Nice play !

    Bought a lot of it at 36.39 commission included on 8th of May.

    For now, am a bit down, but patience should pay. It is considered wide moated with exemplary stewardship at morningstar.

    Good luck !

  78. Aspenhawk,

    We’re definitely on the same page here. ITC reeks of quality. That bodes well for us over the long haul. 🙂

    Have a great weekend over there!

    Best regards.

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