U.S. Utilities With Big Overseas Operations Offer Growth Along With Income

Is it time to look for global diversification in U.S.-based electric utilities? Climate events around the globe in recent years, from disasters to unexpected mildness, suggest the answer is yes. Despite a large business and residential customer base, a utility confined to a particular region of the country can be hammered by unforeseeable weather anomalies.

Still, the business of electricity generation and distribution lacks international scope. In their first quarter reports, several U.S. based utilities blamed what Southern Co. (SO), the largest U.S. electricity supplier by market cap, called “an unusually warm winter” for a decline in revenue and net income. Southern’s operations are concentrated in the southern United States.

Duke Energy (DUK), the third largest name in the sector, with operations in the South and Midwest, noted that “temperatures in the first quarter were the warmest on record for the contiguous United States,” resulting in declines in first-quarter revenues and operating profit.

Meanwhile, the weather was smiling on utility investors somewhere in the world. Eastern Europe suffered record cold last winter.

The AES Corp. (AES), a Virginia-based energy provider, is not as geographically bound as its peer U.S. companies. Its first-quarter report noted increased demand and higher prices in Central and South America. Revenues from Latin American utility operations account for more than twice North American utility revenues. The company’s power generation operations in Latin America, Europe and Asia accounted for 86% of total power generation revenues. The company plans to establish operations in Poland and Turkey.

First quarter profits at AES handily beat Wall Street estimates – posting 37 cents a share, compared to a Zacks consensus forecast of 24 cents and well north of 24 cents in the 2011 first quarter. The company’s earnings yield from operations – how much net income was generated for each dollar of share price – leads its peers.

AES Operating Earnings Yield Chart

AES Operating Earnings Yield data by YCharts

Unlike its peers, AES has an aggressive stock buyback program. But its share price trend lags in large part because AES has not paid a common stock dividend, as is expected by nearly all utility investors. The company plans to initiate a quarterly dividend in the fourth quarter representing a 69% payout ratio, in the mid-range of its dividend-paying peers.

AES Chart

AES data by YCharts

PPL Payout Ratio TTM Chart

PPL Payout Ratio TTM data by YCharts

AES is not alone in international ambitions. PPL (PPL) easily beat the Zacks earnings per share estimate in the first quarter largely from its United Kingdon operations. Geographic diversification as well investments in an array of alternative energy sources – from coal to solar – is a hopeful step by a U.S. electric utilities to grow and protect dividends.

PPL Dividend Chart

PPL Dividend data by YCharts

To be sure, with international diversification comes risk -- currency swings, political unrest and other factors can whipsaw the global company.

Bill Barnhart is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Read more articles about: Investing Ideas  

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