Business & Money

Sizable gains return to the market.
Fortnightly Magazine - September 1 2003

Business & Money

Sizable gains return to the market.


With an average appreciation of 18.9 percent since we last ran SNL Financial's dividend data , SNL's safe dividend picks appeared to do well for any market. However, like the fine golden years of the late '90s for all things technology, recent months have returned sizable gains to investors of energy stocks-not what one would expect from slow growth, dividend-paying electric and gas utilities that make up the majority of the SNL Energy universe.

Such appreciation doesn't necessarily reflect new economic value-although results have improved, and the weather earlier this year helped-but simply a market correction. Stock prices were glum after the barrage of events in the months preceding our first analysis: Enron imploded, California exploded, spark spreads vanished, and debt rating downgrades became more common than energy executives looking for work.

Alas, our 18.9 percent average performance since Feb. 28, 2003, slightly surpassed the S&P 500 (+17.4 percent) and the entire SNL Energy universe (+16.8 percent) while significantly underperforming the SNL index of merchant generators, up a cool 55.1 percent after rebounding from bankruptcy fears. Twenty-two of the 23 companies on our February list posted positive gains in the period.

Still, if 2003 and the present administration has taught us anything, it is that paying a dividend still matters.

Whether due to the higher stock prices or debt ratios that continue to inch up, only 19 companies make our list this time around, down from 23. The average dividend on our list currently pays 4.4 percent, down from 5 percent in February.

Cinergy rates as the best-paying safe dividend company today, paying 5.4 percent while maintaining a payout ratio (69 percent), debt coverage ratio (4.6x) and debt/cap percentage (57.6) well within the boundaries we define as safe for maintaining the dividend well into the future.

Duke Energy Corp. is the largest book capitalization company to not make the list. Duke's relatively high payout ratio (79 percent) and low debt coverage ratio (3.1x) place its seemingly attractive 6.3 percent dividend at risk. AEP misses the list because of its 3.2x debt coverage, and Southern Co.'s 75.7 percent payout ratio excluded it from our list. (While our analysis was consistent in methodology, excluding Southern is admittedly a weak point given the company's risk profile.)

By going with our list of 19, an investor would be riding with winners. Only two, Otter Tail and KeySpan, are down year to date. Small-cap company National Fuel Gas is the strongest year to date on our list, up 24.8 percent.

Our list continues to change. New to our list are KeySpan, Nicor, Peoples Energy, WGL Holdings, Vectren Corp, Northwest Natural Gas, National Gas Fuel Co., South Jersey Industries, and New Jersey Resources Corp. The following companies no longer appear: Alliant Energy, Avista Corp., Cleco Corp., Constellation Energy, DPL Inc., FirstEnergy Corp., MDU Resources, NSTAR, Pepco Holdings, PNM Resources, SCANA Corp., Southern Co., and Wisconsin Energy.


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