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Why NV Energy's Stock Is Worth Owning

http://www.fool.com/investing/dividends-income/2012/12/26/why-nv-energys-stock-is-worth-owning.aspx

Chuck Saletta
December 26, 2012

The next selection for the newly launched Inflation-Protected Income Growth Portfolio is electric generator NV Energy (NYSE: NVE). A relatively small player in the electrical generation market, NV Energy nevertheless covers one of the most brightly lit and heavily air-conditioned cities in America, Las Vegas. NV Energy was formed through the merger of Nevada Power, Sierra Pacific Power, and Sierra Pacific Resources, and the combined company's dividend has risen every year since 2007.

Sierra Pacific had a decent dividend growth streak a few years prior to the merger, until legislation in place to facilitate electric deregulation caused it to eliminate its dividend. Though electric generation is generally considered a "widows and orphans"-type investment, this does illustrate one of the political risks in the industry, and is one of the reasons that the stock is available at a decent valuation today.

Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

  • Payment: The company's annual dividend currently sits at $0.68 a share, a yield of about 3.7% based on Monday's closing price.
  • Growth history: The company has paid higher dividends every year since restoring its dividend in 2007.
  • Reason to believe the growth can continue: With a payout ratio of 51%, the company retains about half of its income to reinvest for future growth. That ratio is well below the 95% of industry giant Duke Energy (NYSE: DUK) or the currently uncovered 112% payout ratio of nuclear power titanĀ Exelon (NYSE: EXC). Additionally, since NV Energy's cash flow statement indicates that its earnings are covered by cold, hard cash, there's little risk that a near-term cash crunch will derail those plans.

Balance sheet and valuation:

  • Balance sheet: A debt-to-equity ratio of 1.4 indicates that the company does use debt, but reasonably, and it certainly hasn't overleveraged itself to the point where a financial hiccup would derail it.
  • Valuation: By a discounted cash flow analysis, the company looks to be worth around $5.0 billion, making its recent market price of $4.4 billion look reasonable. Of course, there's some risk involved. For instance, if it becomes prohibitively expensive to bring new generation capacity online, the company could be forced to pay exorbitant charges on imported power to meet peak demands.

Diversification fit:
The previous picks for the portfolio included: