The Speaking of Dividends column in this weekend’s Barron’s (see here) talked about stocks with high dividend yields, and the possibility that the high yield could mean something other than a cheap stock. When you look at a list of the largest US electric utilities you can see that there are names with noticeably higher yields, and many of these names have stories behind them that require an investor to take caution before purchasing. The four names highlighted below were the worst performing large cap utilities over the last year.
The stock with the highest yield in this group is FirstEnergy, at 4.6%. The company has had significant problems with its competitive generation group and is currently working to dispose of the segment. These difficulties have led the stock to be the worst performer of this group of names. One of the big questions with FirstEnergy right now is if the surviving business will have to pay anything to the bondholders of the generation business, and how big a payment would be required.
Entergy is another company going through changes that concern investors. They are in the process of exiting their competitive nuclear generation business. The company has laid out a plan to execute the exit, but there are always risks in dealing with nuclear assets that likely lead investors to some caution with the name.
Southern Company has been impacted by the construction of two mega projects, the Kemper County energy facility and Vogtle units 3 and 4. The Kemper County project just passed its estimated March completion date. An 8-K announcing the latest delay did not give a new estimated date, though it did mention a new estimate should be available in April when Southern releases their next project status report. Each additional month before completion is estimated to add $25-35M in additional costs. Total costs for this plant have already passed $7B.
Vogtle units 3 and 4 have similar issues with the massive construction costs that have been accumulated. The additional risk for this asset is that Westinghouse is doing the construction work, and looks to be on the brink of bankruptcy.
Lastly, PPL has been caught up in all the Brexit events happening in the UK. Over half of PPL’s 2017 earnings guidance comes from their UK operations, so the risks from Brexit could have a large impact on this stock.