Sometimes natural phenomena imposes its will on the world with force. Hurricanes in the South or along the Eastern seaboard, tornadoes in the Midwest and massive snowfalls in the North during the winter months are all examples of times when Mother Nature demands attention from the world – even the stock market. At the beginning of this week, the National Weather Service issued severe cold warnings to major portions of the Midwest and extending all the way to many of the north eastern states. The cold settled in forcefully mid-week, and as of yesterday had resulted in an estimated 13 deaths.
The cause? An expansion of the “polar vortex” – a pocket of extremely cold temperatures that normally hovers directly above the North and South Poles. According to weather maps, that expansion actually looks a little like a portion of the vortex broke off of the source and began migrating south. The vortex refers to the fact that it is a low-pressure, counter-clockwise flow of air that drives temperatures well below zero degrees Fahrenheit. They aren’t actually all that uncommon during the winter, but according to meteorologists, this one is the most severe in a generation, sending temperatures in states like Minnesota, Wisconsin, Michigan and other parts of the Midwest 30 to 50 degrees below zero.
The winter months can often be a time when it makes sense to pay a little more attention to utility companies that provide gas and electric services throughout the country. Cold temperatures usually mean that we pay more to heat our homes, while mild winters such as the one we saw last year are sometimes cited as a contributor to disappointing results from publicly traded utilities. This last week’s run of extreme cold is forcing residents in all of the affected areas to take drastic measures to stay warm, and threatens farming and the entire agriculture sector as well. Utilities, however are an area that should be expected to see some benefit through the rest of the winter. Today I’m focusing on three of the biggest, publicly traded utility companies that service regions that are being affected right now by severe cold. Which do you think provides the best investing opportunity?
National Grid, PLC (NGG)
Current Price: $54.78
National Grid PLC is an electricity and gas utility company focused on transmission and distribution activities in electricity and gas in both the United Kingdom and the United States. The Company’s segments include UK Electricity Transmission, which is engaged in high voltage electricity transmission networks in Great Britain; UK Gas Transmission, which is the gas transmission network in Great Britain and United Kingdom liquefied natural gas (LNG) storage activities; UK Gas Distribution, which includes approximately four of the eight regional networks of Great Britain’s gas distribution system, and US Regulated, which includes gas distribution networks, electricity distribution networks and high voltage electricity transmission networks in New York and New England, and electricity generation facilities in New York. Its other activities relate to non-regulated businesses and other commercial operations not included within the above segments. NGG’s market cap is $37.4 billion.
NGG is one of the biggest players along the Northeastern seaboard, with operations throughout New York and many of the biggest, most heavily populated areas of New England. The stock has underperformed for most of the past two years, declining from a June 2017 high around $70 per share to a low at the end of December at around $46 per share. The stock has rallied about 14% from that point so far this year, including a wave of mostly bullish momentum this week that certainly appears to be driven by weather-related news. Utility stocks are favored by income-oriented investors for their consistent, reliable dividends, and NGG’s dividend, at about 5.73% on annualized basis, is compelling. Besides the the fact that the stock remains more than 20% below its 2018 high, it is also trading nearly 60% below its historical Price/Book ratio. That adds an interesting value-driven argument to the stock’s current price level that could make it very intriguing as a long-term investment.
PPL Corp (PPL)
Current Price: $31.15
PPL Corporation (PPL) is a utility holding company. Through its subsidiaries, PPL delivers electricity to customers in the United Kingdom, Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky, and generates electricity from power plants in Kentucky. PPL operates through U.K. Regulated Segment, Kentucky Regulated Segment and Pennsylvania Regulated Segment. The U.K. Regulated Segment consists of PPL Global, which includes PPL WPD Limited’s (WPD) regulated electricity distribution operations, the results of hedging the translation of WPD’s earnings from British pound sterling into United States dollars, and certain costs, such as the United States income taxes, administrative costs and allocated financing costs. Kentucky Regulated segment consists of the operations of Louisville Gas and Electric Company (LG&E) and KU Energy LLC (LKE). The Pennsylvania Regulated segment consists of PPL Electric Utilities Corporation (PPL Electric). PPL’s market cap is $22.4 billion.
PPL’s footprint in the United States is located in a different part of the country than NGG, and they aren’t quite as large a company, either; but their price movement over the last two years has nearly matched that of NGG’s, declining from a high a little above $40 per share to as low as $25 in June of this year. This is also another company that pays an impressive dividend yield of about 5.24% at is current price. The stock doesn’t offer the same kind of value-based argument that NGG, however; it is only trading about 7.5% below its historical Price/Book ratio. That means that taking a position in this stock is a strict momentum-based play.
Duke Energy Corp. (DUK)
Current Price: $87.78
Duke Energy Corporation (Duke Energy) is an energy company. The Company operates through three segments: Electric Utilities and Infrastructure; Gas Utilities and Infrastructure, and Commercial Renewables. The Company operates in the United States through its direct and indirect subsidiaries. The Electric Utilities and Infrastructure segment provides retail electric service through the generation, transmission, distribution and sale of electricity to approximately 7.5 million customers within the Southeast and Midwest regions of the United States. The operations include electricity sold wholesale to municipalities, electric cooperative utilities and other load-serving entities. The Gas Utilities and Infrastructure segment serves residential, commercial, industrial and power generation natural gas customers. The Commercial Renewables primarily acquires, builds, develops and operates wind and solar renewable generation throughout the continental United States. DUK’s market cap is $62.6 billion.
DUK is the largest company out of all the stocks in this list, and services much of the Midwest, including many of the areas that have been affected this week by the polar vortex expansion. DUK also pays an impressive dividend of 4.23% on an annualized basis, but unlike either of the other stocks in this list, DUK is up nearly 12% since the beginning of the year. Based on valuation analysis, the stock is basically fairly valued right now; along with the stock’s price performance, it’s hard to make the same kind of value-oriented argument for DUK that exists for either NGG or PPL. DUK is a stock that makes more sense as a higher-yielding, more dynamic alternative to bonds.