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Integrys stock yields are attractive to investors and will remain that way until interest rates rise.     


Integrys Energy dividend yield keeps the stock high

by Matt Higgins
May 7, 2013


Integrys Energy Group Inc. stock is near its 52-week high, and its outlook is merely slow growth, but the dividend yield is a lofty 4.36 percent so analysts call it a hold in the current low-yield environment. 

Analysts estimate Integrys’ 2013 earnings per share of $3.34 or $3.36, according to surveys by Zacks Investment Research and Yahoo Finance and, respectively. This  in line with the company's own expectation. The company earned $3.26 last year.

 

Standard & Poor’s this month boosted its 12-month target price by $3 a share to $60 versus its current price of $61.07, indicating, in effect, that the firm expects the relatively high price to hold. 

“Utilities had a bad year last year,” Standard & Poor’s securities analyst Christopher Muir said. But he added, “Rate base is growing and dividend ratio is high. Integrys is growing in line with other utilities.”

The Midwest experienced an unusually mild winter in 2012, resulting in lower revenues for all Midwest regulated utility companies.

“We expect a 30 percent rate base increase through 2015,” Chief Financial Officer James F. Schott told investors in a conference call following the company’s first quarter 2013 earnings report. 

Muir wrote in an April report on Integrys, “For 2013, we believe the electric distribution utilities will benefit from low fuel and purchased power costs and new rate increases, partially offset by higher operating and maintenance costs and an assumed return to normal weather. However, we expect earnings of wholesale power operators to remain weak in 2013 due to their low-margin power contracts.”


While this year's typical winter weather boosted sales for Integrys, it drove up its operating expenses as well. Utility fuel like natural gas, operation and maintenance expenses, and non-regulated costs of sales were the largest increases in expenses.

Integrys announced on Oct. 1, 2012 that it purchased Fox Energy Center, based in Kaukauna, Wis. “We believe this high-quality acquisition will propel the company’s prospects," Zacks Equity Research wrote in an October blog. "Besides, the addition of this plant will accentuate Integrys’ diversified portfolio which includes coal, natural gas and other renewables. Moreover, this transaction will enhance supply services, improve pricing options and enable the company to effectively manage its energy costs,” 

Seventy percent of the company’s business is in the regulated utilities market, while 30 percent is in areas such as business planning and selling electricity and natural gas for industry use.

Integrys Energy Group’s utility segment includes electric operations of Wisconsin Public Service Corp. and Upper Peninsula Power Co. Integrys’ gas operations include WPSC, Michigan Gas Utilities Corp., Minnesota Energy Resources Corp., The Peoples Gas Light and Coke Co., and North Shore Gas Co.

The city of Chicago awarded Integrys a contract in December 2012 to provide electricity to its residents, worth $300 million annually.

“By buying electricity in bulk, we have secured an agreement that will put money back into the pockets of Chicago families and small businesses while ensuring that our electricity comes from cleaner sources,” Chicago Mayor Rahm Emanuel stated in a press release.

According to Chief Executive Officer Charles A. Schrock, Integrys is moving towards making its regulated portion 85-90 percent of its net income as part of its long-term plans. Schrock provided no specific time frame or plan.

“I think that’s a good move,” Muir said.

Investors and security analysts view utility stocks as a safe haven in uncertain economic times. Economic indicators from the first quarter 2013 and April, such as GDP growth and unemployment rate show an improved economy, but one with an unemployment rate of 7.5 percent.

While utility stocks rarely are avenues for huge profit gains, they do provide high dividend yields.

“Most public utility stocks not only offer attractive dividends, but the opportunity for growth," said

Trevor M. Shakiba, president of The Shakiba Group, a financial planning company. "So, evaluating companies with strong balance sheets poised for growth is key. These stocks are doing well right now as investors are desperately looking for income, specifically investments which offer an attractive yield."

U.S. Treasury bonds were trading at a two-year yield of 0.22 percent on May 6.

“We’re living in a low-yield environment and investors are starving for high yields,” Jerry Braakman, chief investment officer for First American Trust, said.

Integrys’ yield has constantly been in the range of 4-5 percent in 2012. It is outperforming the average utility stock yield, which is in the 3-4 percent range. However, Muir cautions against rushing to buy this stock. “That outperformance will not last in my opinion,” he said. Muir doesn’t see Integrys increasing its dividend payment until 2018.

If interest rates increase, making bonds more attractive, then the yields on high-dividend stocks will not be as competitive as they are now; and with interest rates at historic lows, rates can only go up.  

The Federal Reserve, though, announced on May 1 it would continue its policy of quantitative easing, the policy by which the Federal Reserve purchases huge sums of government securities to add more liquidity to the U.S. economy, keeping interest rates ultra-low for the foreseeable future. 

“Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth,” the Federal Reserve press release stated.

The consensus among analysts is that this policy will benefit utility stocks in general.

“As long as Mr. Bernanke keeps [U.S. Treasury] bond yields low, it will help utility stocks,” Braakman said.