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.
Yesterday, I examined three utility companies you could buy in 2013 without much fear. Despite what might appear to be a sector filled with high dividend yields and steady cash flow, today we'll look at three utilities you'd be better off avoiding in 2013.
AES Corp. (NYSE:AES)
It's not that AES Corp., a diversified utility operating in 27 countries around the globe, doesn't have a good amount of exposure to different energy sources, because it does. My concern around AES stems from its ability to produce organic growth without the aid of acquisitions, and the threat for rising fixed costs and regulatory troubles in Latin America and South America to hurt margins, among other factors.
Usually, being concentrated in emerging markets would shield an energy provider from a first-world slowdown, but it's a bit different for energy stocks like AES, which could be dealing with a rise in costs as businesses within those countries look to make up ground for lost business in any way possible.
Also, AES is one of the worst capitalized and least shareholder-focused electric utilities I can find. This utility's balance sheet boasts net debt of $19.4 billion, of which cost cuts and share buybacks have driven most of its recent EPS growth. Top it off with the fact that AES failed to pay shareholders a dividend for nearly 20 years (instituting a $0.04 quarterly payout only last quarter) and I feel you have all the makings of a utility to keep your mitts off of in 2013.
Edison International (NYSE:EIX)
There's just something about a California-based regulated electric utility that scares the daylights out of me! This year I'd recommend keeping your distance from much of the utility sector, with a big focus on Edison International.
The reason for my concern stems from new regulations issued by the California Public Utilities Commission, which call for rate declines across the board for Pacific Gas & Electric (NYSE:PCG), Edison International, and San Diego-based Sempra Energy (NYSE:SRE). Sempra, luckily, has a myriad of operations outside of California, which should shield it from a big margin hit. PG&E has an amazing array of hydroelectric generating capacity that bodes well for an Obama administration that supports alternative energy. Edison, on the other hand, could stand to see some serious margin headwinds with fewer alternative energy projects in play, a focus solely within California, and nearly $14 billion in net debt. If California's shaky economy didn't give you enough reason to avoid a company with little to zero organic growth, then perhaps its below average 2.9% yield is enough reason to skip Edison in 2013.
Clean Energy Fuels (NASDAQ:CLNE)
I know I'm sort of skirting the definition of a gas utility with Clean Energy Fuels, a provider of natural gas and liquefied natural gas for vehicles, as well as an operator of alternative energy fuel stations, but it's nonetheless a company I'd keep my distance from in 2013.
This is the type of company that's great conceptually and will benefit slowly as automakers like Ford (NYSE:F) and General Motors (NYSE:GM) roll out vehicles, such as the Ford Fusion, or Chevy Silverado and GMC Sierra, capable of running on natural gas. However, according to research gathered by ExxonMobil, only 2% of all U.S. transportation consumption in 2010 was based on natural gas, with much of that demand coming from city fleets like buses and taxis. A whopping 90% was still petroleum-based in the form of gasoline, diesel, or jet fuel! The concept of cleaner burning natural gas is alluring, but no automaker is going to steer its production line away from gas or diesel in one swoop when the infrastructure needed to encourage consumers to purchase a compressed natural gas powered vehicle just isn't there. With losses expected again in 2013 for Clean Energy Fuels, I think you'd be better off avoiding the company and tempering your intermediate-term expectations.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Spectra Energy, Clean Energy Fuels, Ford, and ExxonMobil. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels, Ford, and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.