In this article, let's take a look at Xcel Energy Inc. (XEL, Financial), a $19.09 billion market cap company that offers energy-related products and services to 3.4 million electricity customers and 1.9 million natural gas customers in eight western and midwestern states.
Attractive Dividend Yield
The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends, as it generates healthy cash flow on a regular basis.
The company has raised its dividend every year during the past 10 years, initiating at 4% to a 6% target growth rate.
It now pays $1.20 per share annualized, which means a current dividend yield is 3.2%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments; and is ahead of the industry average of 3.1%. Dividends have been paid since 1910.
We think it is a company with a dividend growth potential, despite any changes in the regulatory environment, economic conditions, or things related to the weather or financial variables like the interest rates.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 1.68% but earnings per share the same at $0.73Â in the most recent quarter compared to the same quarter a year ago . During the past fiscal year, the company increased its bottom line. It earned $1.91 versus $1.86 in the previous year. This year, Wall Street expects an improvement in earnings ($2.00 versus $1.91).
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 (%) |
| XEL | Xcel Energy | 9.96 |
| CPL | CPFL Energy SA | 10.77 |
| OGE | OGE Energy Corp. | 12.81 |
| AEP | American Electric Power Co Inc. | 10.95 |
| PPL | PPL Corp. | 7.24 |
| Â | Industry Median | 8.71 |
The company has a current ROE of 9.96%, which is higher than the industry median and the one exhibit by PPL Corp. (PPL, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, CPFL Energy (CPL, Financial), OGE Energy (OGE, 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.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 19.4x, trading at a discount compared to an average of 21.3x for the industry. To use another metric, its price-to-book ratio of 1.90x indicates a premium versus the industry average of 1.70x, while the price-to-sales ratio of 1.60x is above the industry average of 1.58x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,362, which represents a 16.3% compound annual growth rate (CAGR).
Compared to its closing price of one year ago, the stock price has jumped by 31.29%, exceeding the performance of the S&P 500 Index.
Final Comment
The company achieved regulatory success, and we still believe it is crucial to maintain this, in order to gain long-term returns over other utilities. Also, the firm remains committed to maintain a strong balance sheet with a good financial flexibility as well as continuing rewarding shareholders.
The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Robert Bruce (Trades, Portfolio) and James Barrow (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
