A Mighty FPL Wind

I like dividends, and you should too. Dividends can do a lot of heavy lifting when stocks aren't moving much. FPL Group (NYSE: FPL) -- the old Florida Power and Light -- falls right in line with a 4.8% dividend yield that is protected with a payout ratio of 49% based on 2004's earnings estimate of $5.06.

This morning, FPL reported second-quarter earnings of $1.40 per share, $0.03 better than the consensus estimate of $1.37. Revenues rose 12% year over year to $2.62 billion. FPL provided earnings guidance of $5.05 to $5.15 for 2004 versus the consensus of $5.07. Along with the guidance, management announced a 10% dividend increase from $0.62 to $0.68 per quarter.

FPL stacks up very well statistically against similar utility companies. Its return on equity is 12.5%. Profit margins for the trailing 12 months are a solid 8.6%, which is high for this type of company. Its forward price-to-earnings ratio of 12.5 is significantly lower than the group's, and the projected earnings growth rate for the next five years is slightly higher than the utility sector.

There are many utilities like FPL that have high, safe dividends and low betas. What sets FPL apart is its commitment to wind energy through its FPL Energy subsidiary. FPL is the largest U.S. generator of wind power, with 42 wind farms in 15 states.

Wind is not the most cost-effective way to produce energy, but in the last 10 years, the cost has dropped from $0.30 per kilowatt hour to about a nickel today. According to FPL's website, 24% of the company's energy production comes from wind. The company believes that wind will produce up to 6% of our country's electricity needs by 2020. If that turns out to be true, FPL may be poised to dominate the sector.

The company has benefited from a tax credit program for its wind energy production. FPL is ready to build a new wind farm in Oklahoma, pending Congress' extension of the credit later this year. While management is confident of the outcome, it should be noted that growth will come from wind, and any obstacle to the wind program is an obstacle to FPL's growth.

Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, he owned none of the stocks mentioned, but his clients own FPL Group.