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Wisconsin Energy (NYSE: WEC) is rated the best-managed utility in America by Forbes magazine.
Like Marlo Stanfield, the vicious drug lord in the HBO classic series, “The Wire,” the analysis by Forbes “ain’t much on sentiment”: it is pure numbers, benchmarking the returns of the individual company against both the Standard & Poor’s 500 Index (NYSE: SPY) and its industry.
As the top-rated utility, Wisconsin Energy is certainly not going to appeal to value investors or growth investors as the stock price is up double digits for the last quarter, month, six months, and year of trading.
For 2014, Wisconsin Energy has surged by more than 68%. By many indicators, it is perched for a fall. That should appeal to long-term income investors looking to pick up shares of a top-rated utility. The relative strength index rating is 73.63 (anything approaching 70 is considered to be overbought. The short float is 4.5%, with 1% or 2% considered to be troubling for a publicly traded company. At around $54.50, it is well above the mean analyst target price of $48.04.
The short float tells a significant story by itself.
Shorting a high dividend stock like Wisconsin Energy costs more than it does with one that does not have an income component. Those holding the short position do not collect the dividend, even though they compensate for it in the price of the stock, and are charged for it when it is paid.
This requires even more conviction that the stock price will fall. In addition, as a low-beta stock, the share price does not move up and down that much. Therefore, speculators are not shorting in the hopes of profiting from the traditional swings in the stock: it is expected to decline for fundamental reasons, not market fluctuations.
What should also interest income investors is that there has not been a single insider buy in 2014 for Wisconsin Energy, even as the price has soared.
There were insider sales at prices as low as $42.01. That was on Jan. 24 by Allan Leverett, the President of Wisconsin Energy. Mr. Leverett also had the most recent insider sale at $49.77 on Nov. 11. These appear to be part of a pre-planned program, as each was coordinated with exercising an option.
Few others are selling, though, as evidenced by the high stock price and the low beta of just 0.28.
Even after the price rise, Wisconsin Energy still has an appealing dividend yield of 3.1%. That is twice the dividend yield for ProShares UltraUtilities (NYSE: UPW), a major exchange traded fund for the utilities sector. The dividend was just raised by Wisconsin Energy. It is easily supported by the profits and payout ratio of the Milwaukee-based utility.
The matter for income investors is do you hope for a fall in the price of Wisconsin Energy based on the short float, relative strength index rating, lack of insider purchases, all coupled with the possibility of rising interest rates resulting in lower prices for utility stocks? Or do you buy for the long term and count on the stock and the dividend amount to continue growing simply because Wisconsin Energy is such an excellent company?
Interest rates are supposed to rise, which historically leads to utility stocks declining in price.
But institutional investors such as mutual funds and pension groups own close to 80% of Wisconsin Energy’s shares. That contributes to the low beta, since these are also not the investors who sell in adverse market conditions. Moreover, when the acquisition of Integrys Energy Group (NYSE: TEG) is finalized, Wisconsin Energy will be one of the largest in the Midwest.
There is nothing on the balance sheet or income statement that makes Wisconsin Energy particularly appealing for the long-term investor, however.
Over the next five years, earnings per share are expected to increase by 5.4%. That’s barely half the 10.4% average growth over the last five years.
The dividend growth rate for the past decade has been 15.6%, though, which by itself is very attractive. Should the sector suffer due to interest rate increases, Wisconsin Energy is a utility for income investors to buy for what should be a healthy long-term total return.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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