TAKING STOCK: Allete has the power

Dear Mr. Berko:

Would you recommend Allete, which pays 4.3 percent? I think this might be a good stock to put $20,000 from a certificate of deposit that came due yesterday. It's a utility stock, and utility stocks are supposed to be safe investments. My wife wants me to buy Verizon because her brother works for that company in Duluth, Minnesota, and because we already own 50 shares. What should I do?

-EP, Rochester, Minn.

Dear EP:

"Allete" is a rather froufrou name to paint on all those utility trucks. I can't imagine what was wrong with the name Minnesota Power. But considering society's zest for tattoos, Facebook/Twitter and body piercing, it seems that dumb is the new normal. "Allete," a French word meaning "winged," is also a popular name Parisian mothers give their baby girls. And though this Allete ain't a baby girl, its disappointing stock performance this year suggests it's managed by one.

Allete has been nominated (by me) as one of the poorest-performing electric utility stocks in 2014. Utility stocks have increased their values by an average of 10 percent this year, but Allete's share price has managed to remain the same. And why those bozos in Duluth changed the name to Allete (ALE-$52) is an enigma that not even the angels in heaven understand-though its ticker symbol could be a clue.

Actually, I like the company! I admire its beautiful, cold, rugged 26,000-square-mile service area that keeps 146,000 customers in northeastern Minnesota warm in the wintertime. And the summers are never a power problem there! However, this area is rich in mineral deposits, so 50 percent of ALE's revenues derive from industrial customers, including timber companies, paper-producing companies and companies that mine and process taconite (low-grade iron ore). And each of ALE's 11 customers, five of whom are taconite-processing facilities, requires more than 10 megawatts of generating power. Meanwhile, several companies that deal with natural resources are developing new projects in northeastern Minnesota. PolyMet Mining, Essar Steel and Magnetation are preparing to build major industrial projects in ALE's service area. And when these projects are completed, they'll require more than 625 MW of new power, which represents about 30 percent of ALE's current generating capacity. And kudos to ALE for having, according to the Edison Electric Institute, the fourth-lowest retail rates in the nation.

Revenues in the past decade have grown by 40 percent, to about $1.1 billion this year. Earnings gained nicely in that period, from $1.35 a share to $2.75, while the dividend advanced by 60 percent, from $1.25 to $1.96. Those are good numbers. However, in that same period, ALE's long-term debt ratio increased 35 percent, while return on shareholder equity and common equity declined by 20 percent and 60 percent, respectively. Management may need a little help here. Still, stronger earnings are in store for next year. Wall Street guidance for 2015 suggests that ALE will earn $3 on revenues of $1.21 billion and boost the dividend to $2.05. And by 2017, as the aforementioned projects gain traction, shareholders can expect revenues of $1.4 billion, earnings of $3.75 and a dividend of $2.45. So I'm comfortable buying 100 shares of ALE.

But keep your wife happy and increase your ownership of Verizon (VZ-$50) from 100 shares to 150. VZ's $130 billion acquisition of Vodafone Group will be immediately accretive to its bottom line. VZ appears to be on a run and has reported double-digit earnings increases for the past 11 quarters. Its 110 million wireless customers (the most loyal in the business) account for 70 percent of VZ's $126 billion in revenues, and this Vodafone purchase practically guarantees strong future growth. The $2.12 dividend yields 4.3 percent, which management should be able to grow by about 5 percent yearly for the foreseeable future.

If you buy 100 shares of ALE and VZ, you'll have $10,000 remaining, which might be invested in Fidelity Select Health Care Portfolio (FSPHX-$227). Certainly, unimpeded and explosively higher health care spending will make FSPHX an exceptionally profitable long- and short-term investment.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

©Copyright 2014 Creators.com

Published: Tue, Nov 11, 2014

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