Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars having rolled over to the new year, it's time we take a closer look at the utility sector.
Utility stocks are fantastic portfolio stabilizers for a number of reasons, including the fact that electricity is a near-necessity item and, as such, commands steady pricing power and cash flow generation that often leads to healthy dividends. Today, I propose to take a look at three utility stocks you can buy in 2013.
Exelon (NYSE: EXC )
To answer your question: No, I'll never be done pounding the table on Exelon. Exelon's share price has struggled in recent years because of its role in being the largest provider of nuclear energy in the United States. Despite being a clean and relatively safe form of energy generation, nuclear power is one of the costliest forms of energy to produce at the moment and is losing ground to natural gas facility transformations and even coal.
Exelon, however, has been taking steps to bring down its costs and give it a competitive edge once again. These steps include signing a solar grid contract with First Solar (NASDAQ: FSLR ) to boost its solar capacity, as well as expanding its wind farms which are capable of producing 922 MW of generation throughout 10 states.
Another factor that can't be discounted is President Obama's push toward energy independence. With favorable energy policies in the offing, we could see a push for nuclear reactor subsidies in an attempt to rid the U.S. of its reliance on foreign oil. With a dividend yield near 7% and at just 12 times forward earnings, I don't think you can go wrong with Exelon.
American Water Works (NYSE: AWK )
Speaking of necessity stocks, who around here can honestly say they don't need water? Water is one of the most overlooked necessity items, and American Water is the largest player in the field, operating throughout the U.S. and relying on everything from cost-cutting to IT-improvements to increase its profits.
In spite of the effects of Hurricane Sandy, American Water Works backed its full-year forecast in its most recent quarter and announced a 20% improvement in net income on just a 9% rise in sales. Water companies like American Water Works command incredible pricing power with few alternatives available; although, being part of a regulated industry, the increases American Water can request are often tame. With a focus on small acquisitions and reasonable organic growth, as well as producing solid dividend income for shareholders, American Water Works seems like a great value even here at 17 times forward earnings.
Southwest Gas (NYSE: SWX )
I can't think of a better way to take advantage of an area of the U.S. with relatively predictable weather that's finally seeing a rebound in the housing market than by buying natural gas transmission utility, Southwest Gas.
As you might imagine, Midwestern and Northeastern natural gas companies faced a rough 2012 as natural gas prices swooned to decade-lows and warmer than expected weather crushed demand. Gas companies based in the Southwest have far fewer issues; the weather in Arizona, Nevada, and California, where Southwest Gas operates, tends to be very predictable. This means the only real concern for Southwest Gas is increasing natural gas prices (which we've been witnessing for some months now) and a rebound in the housing markets to drive natural gas usage (also something we've been witnessing).
From a valuation perspective, Southwest Gas' forward P/E of 13 is below the industry average, and its debt-to-equity ratio is almost 20% lower than industry behemoth Sempra Energy (NYSE: SE ) whom it competes with in California. If you're a natural gas bull, Southwest Gas is a smart play for you!
Tomorrow we'll flip the switch
Stay tuned for this articles' sequel tomorrow when I'll reveal three utilities that I'd just as soon avoid in 2013.
In the meantime, make sure you start 2013 with a bang and get the inside scoop on what Motley Fool superinvestor David Gardner will be buying this year. He's crushed the market in his Stock Advisor and Rule Breakers portfolios for years, and now I invite you to a personal tour of his flagship stock picking service: Supernova. Just click here now for instant access.