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Utility companies are usually seen as stable, boring investments. Government regulations cap a corporation's profits, making it difficult for utilities to grow their top lines. But there's one easy way for strategically located utilities to dramatically boost their revenue. Keep reading for the secret to growth in the utility sector, as well as specific companies that are poised to profit from this trend.
Utility companies generate and/or transport electricity to our homes and businesses. Since electricity is seen as a public necessity, government regulations make sure utilities can't charge exorbitant prices that would leave average Americans penniless or powerless.
There's really only one way for a company to grow revenue: Increase its customer base. Corporations aren't allowed to charge a customer $10 instead of $5, but they can provide $5 of power for two customers and enjoy greater returns from the increased synergistic value. Since nearly every person in the U.S. uses electricity, population growth trends provide a glimpse of where tomorrow's customers will be using the most power. Let's take a look.
Deep in the heart of Texas
Every year, the U.S. Census Bureau publishes population estimates for each state. This year's top five growth states are Texas, California, Florida, Georgia, and North Carolina. These states boast an average 1.2% increase and welcomed more than 1 million new citizens into their borders between 2010 and 2011. Five states added less than 1,000: West Virginia, Maine, Vermont, Michigan, and Rhode Island.
Duke Energy's (NYSE: DUK ) July merger with Progress Energy made it the largest electric utility in the nation, serving more than 7 million customers across six states: Indiana, Kentucky, North Carolina, Ohio, South Carolina, and Florida. With Progress' Floridian footprint and significant market power in the Tarheel state, Duke Energy is set to expand its customer base even further in the coming years.
Perhaps that's why it sports an average dividend of 4.7%, something investors will have to consider when looking to Duke for growth.
Exelon (NYSE: EXC ) generates and delivers electricity to more than 5 million homes and businesses and is the largest power generator in the United States. Its electricity is sold to utilities in 47 states and Canada, even though its regulated utility division reaches only Maryland, Illinois, and Pennsylvania. These three states have an average 0.35% population increase (half the average), meaning Exelon will have to rely on its nearly nationwide generation business for increasing sales. Exelon's stock offers a 5.7% dividend, a full percentage point above the industry average.
Both NextEra Energy's (NYSE: NEE ) generation and utility divisions stand to benefit from population growth trends. According to the company's 10-K, 31% of its generation capacity is located in Texas, the fastest-growing state. An additional 20% of its capacity originates in higher-growth regions of the Western and Southern United States. NextEra's utility division, Florida Power and Light, will also rake in more customers from the Sunshine State's growing population.
Utility investors might be turned off by the company's below-average 3.7% dividend yield, but NextEra offers long-term growth potential as it reinvests in renewable-energy sources such as wind and solar.
National Grid (NYSE: NGG ) has a customer base half the size of Duke Energy, but it also has a secret weapon. Although its business in New York, Massachusetts, and Rhode Island won't skyrocket anytime soon (average 0.27% growth), investors would be wise to remember that 67% of this corporation's profits comes from its U.K. operations.
The 2011 U.K. census reported the kingdom's largest population increase ever. With a 7% growth rate, the U.K. grew by 3.7 million people, compared with the United States' 2.2 million additions. Business is booming across the pond, and National Grid could reap massive returns. Plus, its 7.4% dividend is an attractive enticement for any income investor.
As a final wild card, investors can look to the geographic disconnect between energy sources and energy users as an investment opportunity in and of itself. As my colleague Sarah Wright discusses, smart grids are a way for the U.S. to better manage the supply and demand of electricity nationwide. ABB (NYSE: ABB ) specializes in energy storage and operates in 100 countries across six continents. For a non-utility stock, its 4.3% dividend is admirable, even though it's no match for National Grid.
Shock your stocks
Population trends provide investors with a unique edge over backward-looking analysts. Incorporating these details into your portfolio picks will allow you to focus your dividend plays on utilities with better-than-average growth opportunities, increasing your returns for years to come.
The utility sector isn't the only one sporting huge dividends with growth potential. The Motley Fool has prepared a special free report outlining nine rock-solid dividend stocks to steadily boost your portfolio's profits. It's as free as this article, so be sure to grab your free copy today.