Public Service Enterprise Group (PEG 1.11%) defied sector standards this quarter by beating on both its bottom and top lines. But with one-year returns hovering at 0%, does Mr. Market know something you don't? Let's take a closer look at this dividend stock's portfolio profit potential.
Number crunching
On the top line, PSEG sales squeaked ahead of analysts, clocking in at $2.31 billion compared to $2.28 billion estimates. Compared to Q2 2012, sales came in 10% higher.
On the bottom line, PSEG grabbed similar growth. Investors were happy to see adjusted EPS of $0.48, $0.02 above Mr. Market's predictions and $0.05 higher than the same period last year.
For a peck of perspective, PSEG's sales have grown 7.3% over the past five years, while adjusted EPS has tapered off 22%.
PEG Revenue Annual data by YCharts
Beyond the numbers
"We are very pleased with our results," Chairman, President, and CEO Ralph Izzo told investors during PSEG's earnings call. And he's got reason to be.
Natural gas has lent a helping hand to the utility's earnings. PSEG's close proximity to the Marcellus basin has allowed the company to pump power to its customers at cheaper prices than competitors, while still hedging to keep base load prices in check.
Dominion (D 1.10%) is also investing heavily in its natural gas exposure around the Marcellus and Utica shale formations. The utility is extending transmission lines in the area, and just received approval for a new $1.3 billion, 1,358 MW plant.
But PSEG's not just natural gas. The utility has over 3,600 MW of nuclear capacity and recently received approval to spend $446 million on up to 143 MW of new solar.
Transmission also added $0.04 to this quarter's earnings, and PSEG plans to keep capital expenditures pumping into this business. In the next two years, the utility will allocate $3.4 billion (50% of total capex) to its transmission business. That number mirrors NextEra Energy's (NEE 0.54%) and Sempra Energy's (SE) $3 billion investment into Florida's third major natural gas pipeline.
Not only is cheap natural gas raising general demand for transmission across the nation, but the business model behind it provides utilities with lucrative "toll booth" income to provide a steady stream of income for years to come.
Can PSEG keep pulling profit?
Looking ahead, Izzo told investors that although the utility isn't changing its full-year 2013 guidance of $2.25-$2.50 EPS, he expects the final number to clock in at the upper end of the range. Past profits aren't evidence of future earnings, but PSEG's setting itself up for a solid future.
The company has a long history of increasing its dividend, and its current 4.5% yield is in line with its industry. Recent bond return boosts have pushed PSEG's stock price down 5%, creating a nice extra upside for long-term investors. I'm making an "outperform" call on my Motley Fool CAPS page, and look forward to seeing where this utility heads in the years to come.
