Taking Stock: More utility stocks

Dear Mr. Berko:
About a month or so ago, you recommended five or six electric utilities, and believe it or not, I own at least 65 to 90 shares of each. I like utility issues and reinvest their dividends, which I have been doing for years. I have $1,200 and wonder if you could recommend another utility for a long-term investment. We are in our mid-40s and are building a conservative portfolio for our retirement. And we are saving like mad because we don’t believe Social Security will be here for us.
 L.K., Norman, Okla.

Dear L.K.:
You’re probably right about SS. Our government thinks it can multiply wealth by dividing it. Congress just can’t understand that it cannot give to others anything that it does not first take from someone else. 

Meanwhile, if I could have included another utility in that list, I would have added Avista (AVA-$20.43), a $1.6 billion utility formerly known as Washington Water Power. AVA never sold any water but generates about 35 percent of its power hydroelectrically. AVA purchases 35 percent of its electrical needs and derives its remaining power 13 percent from coal, 15 percent from natural gas and 2 percent from, believe it or not, wood waste. Now ain’t that a pistol?

Anyhow, I like AVA for the following reasons: Since 2002 (which was a turnaround year for the company), revenues have grown annually from $980 million to an expected $1.65 million in 2010. In that time frame, earnings have increased annually from $0.67 to an expected $1.67 this year. And AVA’s dividend increased in eight of the last eight years from $0.48 to $1 and yields 4.9 percent. 

I like this company because I think future revenues can grow to $2.1 billion by 2013-14 and because I believe future earnings can grow by 20 percent to about $1.93. And if those revenues and earnings meet Wall Street’s expectations, AVA’s board of directors will increase the dividend in the coming four years to $1.25. 

AVA sells electricity and gas to nearly 700,000 industrial, residential and commercial customers in Oregon, northern Idaho and eastern Washington state. Now, I like AVA because the stock trades below book value and its price to sales is 40 percent below the industry average. And strangely enough, I like the company because this tells me AVA may be undervalued. AVA’s 13.7 percent operation margins are well below the 18.3 percent industry average. And management has lots of room to improve this number. 

Strangely enough, I like AVA because its 5.7 percent net profit margins are hugely below the 11.6 percent industry average. Imagine the earnings potential if management improves this number. 

And I like Avista because its 8.2 percent return on equity suffers in comparison to the industry’s 15.9 percent number. Management also intends to improve this metric. I also like AVA because its debt-to-equity ratio is lower the industry average, and that’s good. 

And finally, I like Avista because its non-utility subsidiary (Advantage IQ) is involved in energy-management services, and when it reaches critical mass in the next few years, the board’s long-term plans call for an initial public offering.

This $1.1 billion mid-cap company has 55 million shares outstanding. No preferred stock and the dividend payout represent an impressively low 55 percent of earning. 

Utilities may be a slow-grow business, but I feel that AVA has the potential to be a $25 to $30 issue in the next four to five years. This makes Avista an excellent growth and income issue, and I’d not hesitate a Sioux City second to put this stock in my portfolio.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
© 2010 Creators Syndicate Inc.

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