Business & Money
The Dividend-Centric Universe
June 15, 2003
By Richard Stavros
Will dividends become the sole focus for investor valuations of utilities?
With last month's favorable Senate vote to repeal the tax on dividends from 2004-2006 and reduce it 50 percent this year, and the high-profile conference committee meetings between the House and the Senate at press time, many are asking if investors are, or should be, beginning to evaluate utility companies solely on the basis of the dividend.
Paul Patterson, an analyst with Glenrock Associates, in a report titled Dividend Yield: Implications for Value & Capital, outlines some of the issues surrounding the increased focus on the dividend. While he believes that the dividend tax repeal would be positive for utility valuations, he does not believe that investors will rely solely on the dividend in stock value determination. Rather, the dividend will be viewed as only one factor among many.
Patterson does not believe that the dividend discount model (DDM) should be used as the sole means of determining a given stock's value. In the report, Patterson evaluates the DDM and finds several reasons why investors should be cautious in relying solely on DDM. Patterson believes that DDM fails in situations where there is a great deal of uncertainty as to the future growth, or lack thereof, of a company.
In addition, Patterson says it is not clear that "most investors value stocks solely on the expectation of dividend payments, however rational this viewpoint may be. Although, in theory, the DDM model can even apply to 'growth' companies not yet paying dividends, we do not believe that all market participants view dividends as the sole source of value that they expect a stock to provide." Not to mention that the DDM's model calls for a "relatively complex calculation using a set of factors projected into the future" that will "likely only be used reticently, if at all, by investors," Patterson says. In the report, he explores alternatives to the DDM as a means of incorporating yield in valuing companies.
Moreover, Patterson says the new emphasis on the dividend could change the way companies allocate their capital. "The increased preference for dividends could cause companies to focus less on redeploying capital into 'growth investments' and more into relatively 'safe' investments. Specifically, it could reinforce a tendency toward risk aversion. … [If] favorable tax treatment of dividends were to be implemented in some way, we think this could further enhance this trend."
Richard Stavros is executive editor of Public Utilities Fortnightly.
Business News Bytes
Duke Energy Corp.'s 1Q Earnings Down
Duke Energy Corp.'s first-quarter profit fell sharply from a year ago, but the results exceeded Wall Street's expectations. Duke Energy said it earned $225 million, or 25 cents per share, in the January-March period, down from $382 million, or 48 cents, in the first quarter of 2002. After deducting a one-time charge for accounting changes, Duke Energy's earnings per share in the quarter were 43 cents. Thomson First Call consensus estimates were 35 cents per share.
Southern Co. Announces 1Q Earnings Jump: Raises 2003 Guidance
Southern Co. reported earnings of $298 million, or 41 cents per share, in the first quarter. Cold weather and continued customer growth in the Southeast helped boost demand for electricity, and the company also had a solid performance from its competitive generation business. The results compared with earnings of $224 million, or 32 cents per share, in the same period a year ago. "By continuing to focus on the fundamentals that have made us successful, we are off to a good start in 2003," said Allen Franklin, chairman, president, and CEO. "Our commitment is to execute our strategy to meet our financial, operational, and customer satisfaction goals for the full year." Southern Co. CFO Thomas A. Fanning said during an April 30 conference call that the company is raising its 2003 earnings guidance to $1.86 per share, up from previous guidance of $1.84 per share. The change is based on strong first-quarter earnings and assumes normal weather for the rest of the year.
Avista Earnings Rise on Energy Units: FERC Cloud Hangs Over Company
Avista Corp. reported higher first-quarter earnings on strong results from its energy and utilities divisions, improved results from its information and technology businesses, and reduced interest and operating expenses. Avista Corp. reported a profit of $15.6 million, or 32 cents a share, up from $10.5 million, or 22 cents a share, in the year-ago period. On an operating basis, the company earned 35 cents per share in the period. The company also said its still expects full-year earnings in the range of 80 cents to $1.00 per share. The average analyst estimate for 2003 earnings is 84 cents per share. Avista has been the target of a probe by the Federal Energy Regulatory Commission on allegations that it acted as a middleman for Enron Corp. and its Portland General Electric utility to inflate prices of wholesale electricity during the western power crisis that began in mid-2000. FERC lawyers reached an agreement last December to drop allegations against Avista, saying they found no evidence of illegal actions by the company. However, in early April, a FERC judge said he could not accept the agency's proposed settlement with Avista because of a new FERC investigative report detailing manipulation of the California power market. The company has denied any wrongdoing.
Exelon's 1st-Quarter Soars on Higher Gas Sales
Exelon Corp.'s first-quarter net income surged amid higher weather-related gas sales and year-earlier results weighed down by an accounting change. Exelon posted net income of $361 million, or $1.11 a share, up sharply from $8 million, or two cents a share, a year earlier. Excluding the impact of an accounting change, as well as other charges and gains, Exelon said it earned $397 million, or $1.22 a share, compared with $250 million, or 77 cents a share, a year earlier. Analysts surveyed by Thomson First Call had expected earnings of $1.06 a share, excluding items. The latest results included an accounting-related gain of $112 million, or 34 cents a share, while year-earlier results show an accounting-related charge of $230 million, or 71 cents a share. Operating revenue, meanwhile, rose 21 percent to $4.07 billion from $3.36 billion a year earlier. Exelon attributed improved results to higher gas sales, increased revenue at its ComEd unit, lower depreciation and amortization expense, fewer nuclear outages, and lower interest expense, which more than offset higher operating expenses such as pension and benefit costs. For 2003, Exelon still expects operating earnings of $4.80 to $5 a share, assuming normal weather for the rest of the year. Wall Street expects the company to earn $4.91 a share in 2003, according to a survey by First Call. In 2002, Exelon posted operating earnings of $4.83 a share. Second-quarter earnings should represent between 21 percent and 23 percent of full-year operating earnings, Exelon said.
The company also said it expects to meet or exceed its target for annual earnings growth of 5 percent and to generate cash that will provide flexibility to successfully handle the end of the regulatory transition in Illinois in 2007.
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