Northeast Offers Safe Bet: Under the Radar
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SPRINGFIELD, Mass. (
) -- During the summer rally, investors piled into speculative financial and homebuilding stocks, and neglected safe havens. Right now, utilities offer cheap shares, low volatility and stable dividends. In a sluggish economy, investors will be happy with consistent single-digit returns.
Northeast Utilities System
(NU)
, which sells electricity in New England, offers a 4% dividend yield, higher than the 2.7% average of the
S&P 500 Index
. Its payout ratio, a measure of dividend safety, is stable at 51%. That means Northeast Utilities is unlikely to reduce its dividend in the near future and may in fact increase it.
The company's second-quarter net income increased 42% to $84 million, but earnings per share climbed a more modest 24% to 47 cents, restrained by a higher share count. Its gross margin rose from 16% to 21%, and its operating margin jumped from 10% to 15%.
The company's shares have dropped 7.3% over the past year, while the
S&P 500 Utilities Index
plunged 17%. With a price-to-earnings ratio of 11.8, the stock trades in line with other utilities, but is cheaper than the 18.5 multiple of the S&P 500.
The stock has a beta, a measure of market correlation, of 0.5, so the shares are less volatile than the overall market and its peer group. A stable price is attractive if you believe that we're headed for another market drop.
There are reasons to be cautious. For example, the company has weak liquidity and heavy debt, evident in its quick ratio of 0.8 and debt-to-equity ratio of 1.5. However, large debt is common among utilities and management is addressing the problem. Its cash balance has grown 473% to $543 million since last year's second quarter.
Northeast Utilities' second-quarter earnings announcement also presented some red flags. The company expects higher capital expenditure costs in its transmission segment this year. And its distribution segment achieved quarterly profit growth by resolving tax issues, not though organic expansion.
Still, we rate Northeast Utilities "buy." It offers a safe haven in a shaky market.
-- Reported by Jake Lynch in Boston
.
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