Business & Money
Is It Safe?: Finding the Best Utility Dividends
April 1, 2003
By Scott Barclay
Which public companies have the best payout-and which missed the list?
The Bush administration's early January proposal to make dividends tax-free for investors has placed the dividend at the forefront of investor consciousness. While the utility industry has traditionally been a dividend-paying safe haven for investors, the collapse of Enron and the subsequent turbulence in the power and gas sectors over the past 18 months have combined to seriously undermine investor confidence in energy companies to deliver on promises and continue paying a robust dividend. While many in Congress are opposed to the plan, the administration is still optimistic that a full or partial enactment will become law this year. As Steven Fleishman at Merrill Lynch says, "The timing of a dividend tax change could not be better for the utility sector." While the timing couldn't be better, investors have yet to bid up energy stock prices. The broad SNL Energy index was down 7 percent as of March 4.
Combing the list of all public electric and gas utilities in the United States, SNL Financial sets out in the attached table to find energy companies that pay a high dividend that is relatively "safe." SNL lists companies that pay a greater than 3.5 percent dividend and that meet the following criteria: the dividend payout ratio (i.e. dividends as a percentage of earnings) must be below 75 percent, EBITDA/Interest & Preferred Dividend coverage must exceed 4x, and leverage must be below 70 percent.
Twenty-three companies met these criteria, including industry stalwarts Dominion Resources, Southern Co., and Exelon Corp. The median company to make the SNL list pays a 4.8 percent dividend, a payout ratio of 55 percent, a 5.1x EBITDA ratio, and is 60 percent leveraged.
A few notable industry names, of course, did not make the cut. Duke Energy Corp. was the largest company by market cap to not make the list. While Duke pays an 8.1 percent dividend, the payout ratio is currently at 77.5 percent and the EBITDA ratio is below 4x, at 3.6x. American Electric Power is another large, well-known company whose hefty 11 percent dividend is at risk. Although the company is scheduled to pay a dividend of $2.40, analysts estimate that the firm will make only $2.28 this year. With the dividend so high, it is probable that investors have already factored a dividend cut into the stock price or that the dividend will be cut by the time you are reading this. Other $8 billion-plus companies to not make the list include Progress Energy, Consolidated Edison, TXU Corp., and Entergy Corp.
Scott Barclay is an analyst in the energy research division of SNL Financial. He can be reached at sbarclay@snl.com.
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