In this article, let's take a look at Scana Corp. (SCG, Financial), a $7.05 billion market cap company, which is a South Carolina corporation that is engaged in the generation, transmission, distribution and sale of electricity to retail and wholesale customers and the purchase, sale and transportation of natural gas to retail customers.
Principal driver
Some years ago, the company invested in the first new nuclear project in the U.S. As a result, Scana planned to increase its growth, due to the doubling size it will have in the next ten years. The plant is still in construction, and it will constitute the main driver.
The highest returns
The company achieved a 5% annual earnings growth in the years 2009 to 2013. Further, the regulators have granted an interesting amount of dollars (around $200 million) of base rate increases as well as annual nuclear project rate increases.
Having a good relationship with regulators is crucial, as the firm invests an average $1.4 billion annually until 2017 in its business.
Dividend yield
The company has good cash that allows it to reward current through dividends. Early this year, the company announced an increase in the quarterly dividend from 52.3 cents a share to 52.5 cents a share.
Dividend-payment history affirms its commitment to maximize shareholder wealth. The annualized yield is 4.2% which we consider is very attractive for income investors.
Estimated one-year price
According to Yahoo! Finance, the estimated one-year target share price is $ 52.29, so if you buy shares at current market price ($49.24), your return from price appreciation would be 6.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $2.1 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 4.2%. So the total expected return for investing in Scana is 10.4%, which we believe is an attractive stock return.
Revenues, margins and profitability
Looking at profitability, revenues slightly increased by 0.98% and earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.68 vs $0.60). During the past fiscal year, the company increased its bottom line. It earned $3.38 versus $3.14 in the prior year. This year, Wall Street expects an improvement in earnings ($3.62 versus $3.38).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| SCG | Scana | 11.16 |
| WEC | Wisconsin Energy Corp. | 14.5 |
| AEE | Ameren Corp. | 8.92 |
| CMS | CMS Energy | 14.77 |
| LNT | Alliant Energy Corp. | 12.02 |
| Â | Industry Median | 8.41 |
The company has a current ROE of 11.16% which is higher than the industry median. Also, it is higher than the one exhibit by Ameren (AEE, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Wisconsin Energy (WEC, Financial) and CMS Energy (CMS, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
We must mention that current ROE exceeded the one from the same quarter one year prior, and this is a sign of strength.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.2x, trading at a premium compared to an average of 20.10x for the industry. To use another metric, its price-to-book ratio of 1.44x indicates a discount versus the industry average of 1.52x while the price-to-sales ratio of 1.45x is below the industry average of 1.54x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
As outlined in the article, regulators grant some privilege to charge customers rates and make the company earns a good return and we believe this will continue. Also, we think the gas business will continue to generate earnings and cash flow to compensate shareholders.
Further, all the measures we have seen in the relative valuation section and the return on equity that exceeds the industry average make me feel bullish on this stock.
Hedge fund guru like Steven Cohen (Trades, Portfolio) added this stock to his portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
