Skip to main content

Shares of energy utility

Wisconsin Energy

(WEC) - Get Free Report

have lost their spark in 2007; the stock is down 6% year to date, closing Wednesday at $44.27.

Despite that, the stock has received two analyst upgrades in the past week, and with 9% annual earnings growth expected over the next few years -- three times the industry average -- Wisconsin Energy may be poised for a rebound.

The company provides electricity and natural gas to more than 1 million customers in northern Wisconsin and Michigan's upper peninsula. The above-average earnings growth is expected to come from three new electricity generation plants that Wisconsin Energy is building, one of which is projected to open during each of the next three years.

The strategy, deemed "Power the Future," is expected to bring two coal-fired electric plants, a natural gas-powered electric plant and a wind farm online by 2010. One immediate financial benefit of the new plants is that they've already been budgeted by state regulators to operate at a return on equity (net income divided by shareholder equity) of 12.7%, compared with the 11.4% ROE that the company generated in 2006.

With that in mind, I'm here to answer readers' questions: Should you buy shares in Wisconsin Energy? Do the shares represent value at current levels, or should readers interested in utility stocks focus elsewhere?

In May, the utility filed with Wisconsin state regulators for a 15% increase in retail rates, which would boost annual revenue by $354 million. Hearings are scheduled for the company to present its rate case next month, with a decision expected to be implemented by early 2008.

While this is a larger rate increase than most utilities are usually granted, it is worth noting that Wisconsin Energy is asking for funds to finance construction plans that have already been approved by state regulators.

Wisconsin Energy's 2.3%

dividend yield is about half of the industry average, and the company is also only on track to pay out 38% of expected 2007 per-share earnings of $2.66 as dividends. On the other hand, many other regulated utilities like New York-based

Consolidated Edison

(ED) - Get Free Report

choose to pay out up to three-quarters of their annual earnings to support their higher dividend yields.

But one benefit of Wisconsin Energy's lower dividend is that it does not need to tap the external financing markets to cover its capital expenditure requirements. Con Ed, on the other hand, is forced to dilute investors by selling about $1 billion worth of new shares and debt just to fund maintenance costs on its aging network and cover its 5% dividend yield.

While investors usually buy regulated utilities for their dividends, I believe that Wisconsin Energy shares are attractive at current levels for the company's growth potential. With relatively lower risk in this volatile environment, the stock should trade into the low-$50s over the coming quarters.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

click here

to send him an email.

Interested in more writings from David Peltier? Check out his newsletters, Dividend Stock Advisor

and Value Investor