{"id":383143,"date":"2010-03-03T06:30:05","date_gmt":"2010-03-03T11:30:05","guid":{"rendered":"http:\/\/dividendsvalue.com\/?p=5854"},"modified":"2010-03-03T06:30:05","modified_gmt":"2010-03-03T11:30:05","slug":"increasing-dividend-yield-part-i-utilities","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/383143","title":{"rendered":"Increasing Dividend Yield Part I: Utilities"},"content":{"rendered":"

\"\"<\/a>This is the first installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio’s overall yield-on-cost. This week we are looking at Utilities<\/strong><\/a> – those investments long considered as a safe harbor for “orphans and widows.”<\/p>\n

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What’s the difference between a Ponzi scheme and a utility company? Before I answer that question, let’s look at what a Ponzi scheme is.\u00a0 Wikipedia defines it as:<\/p>\n

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A\u00a0 fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.<\/p>\n<\/blockquote>\n

In effect, a Ponzi scheme pays yesterday’s investors with money from today’s investors. It works great until there aren’t enough new investors to pay the old investors. In a similar manner, most utility companies rely on new capital either in the form of debt or equity to fund investment and to pay dividends. Consider the following:<\/p>\n

Atmos Energy Corp.<\/strong><\/span> (ATO) – Yield: 4.88%
\nShares Outstanding: 2000 31m; 2009 92m
\nLong-Term Debt: 2000 363.2m; 2009 2,159.5m
\nYears of Negative Free Cash Flow: 5 of 10<\/p>\n

Black Hills Corp.<\/strong><\/span> (BKH) – Yield: 5.10%
\nShares Outstanding: 2000 22m; 2009 38m
\nLong-Term Debt: 1999 160.7m; 2008 719.2m
\nYears of Negative Free Cash Flow: 7 of 10<\/p>\n

Connecticut Water Service Inc.<\/strong><\/span> (CTWS) – Yield: 4.01%
\nShares Outstanding: 2000 7m; 2009 8m
\nLong-Term Debt: 1999 65.4m; 2008 92.2m
\nYears of Negative Free Cash Flow: 5 of 10<\/p>\n

California Water Service Group<\/strong><\/span> (CWT) – Yield: 3.29%
\nShares Outstanding: 2000 15m; 2009 20m
\nLong-Term Debt: 1999 156.6m; 2008 373.5m
\nYears of Negative Free Cash Flow: 10 of 10<\/p>\n

Consolidated Edison, Inc.<\/strong><\/span> (ED) – Yield: 5.52%
\nShares Outstanding: 2000 212m; 2009 276m
\nLong-Term Debt: 2000 5,415.4m; 2009 9,854.0m
\nYears of Negative Free Cash Flow: 6 of 10<\/p>\n

MGE Energy Inc.<\/strong><\/span> (MGEE) – Yield: 4.40%
\nShares Outstanding: 2000 16m; 2008 22m
\nLong-Term Debt: 1999 148.6m; 2008 272.5m
\nYears of Negative Free Cash Flow: 7 of 10<\/p>\n

Middlesex Water Co.<\/strong><\/span> (MSEX) – Yield: 4.31%
\nShares Outstanding: 2000 10m; 2008 13m
\nLong-Term Debt: 1999 82.5m; 2008 118.2m
\nYears of Negative Free Cash Flow: 10 of 10<\/p>\n

Progress Energy, Inc.<\/strong><\/span> (PGN) – Yield: 6.48%
\nShares Outstanding: 2000 157m; 2008 260m
\nLong-Term Debt: 1999 3028.6m; 2008 10,659.0m
\nYears of Negative Free Cash Flow: 5 of 10<\/p>\n

Integrys Energy Group, Inc.<\/strong><\/span> (TEG) – Yield: 6.17%
\nShares Outstanding: 2000 26m; 2008 76m
\nLong-Term Debt: 1999 634.5m; 2008 2,396.7m
\nYears of Negative Free Cash Flow: 10 of 10<\/p>\n

Each of the above companies are growing their debt and shares outstanding while generating insufficient cash to fund their operating expenses<\/strong><\/a>, including normal capital replacements, in at least 5 of the last 10 years. For a company to consistently raise its dividends, it must generate strong cash flows sufficient to meet operating obligations and to service outstanding debt. When the day comes that these companies can not raise enough capital to fund the operating requirements, the first source of additional cash will likely come in the form of a lower or eliminated dividend.<\/p>\n

So, back to the original question, what is the difference between a Ponzi scheme and a utility? The answer is simply disclosure<\/em>. All the above information on these companies was made available via S.E.C. filings. Unlike Bernard Madoff, these companies are telling you exactly what they are doing, thus there is no intent to defraud. I own some of the companies above, but I won’t be rushing to add to increase my positions.<\/p>\n

Caveat emptor!<\/p>\n

Full Disclosure: Long ED, PGN, TEG. See a list of all my income holdings here<\/strong><\/a>.<\/em><\/p>\n

(Photo Credit<\/a>)<\/h5>\n

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Related Posts:<\/h3>\n