I apologize for the late update on this event. I was travelling and away from an Internet connection for the last few days.
Integrys shares have fallen sharply for two related reasons:
First, the company posted quartlery earnings of $0.33 vs. $1.11 and is now forecasting substantially lower earnings for the current year (a range of $2.51-$2.66 vs. the consensus expectation for $3.77).
Second, it announced its intention to sell off its unregulated utility operations, or at least substantially reduce its activity in this part of the business.
I say the two are related because much of TEG’s earnings weakness can be attributed to its energy trading. Simply put, TEG uses derivatives to bet on energy prices. And because of accounting rules, these bets have to be “marked to market” every quarter. It doesn’t matter if the contracts ultimately prove profitable or not.
What about the company’s plans to divest the non-regulated operations? It would certainly remove much of the volatility to results. And in this environment, a cleaner balance sheet is a good thing, too.
However, the company will likely lose a lot of upside potential in the bargain. This might also prove an inopportune time to try and sell pieces of the business.
For all these reasons, I expect to see the company lean more toward less energy trading and not a near-term outright sale of its non-regulated operations like its solar-power facilities in NJ and CA, gas-fired generating plants in WI or New England hydroelectric facilities.
What about the dividend? Well, the company just continued its half-century streak of annual increases. Lower earnings certainly jeopardize that payment, but I do not see a high likelihood of a cut.
In my opinion, this is a case of the market “shooting first and asking questions later.” Given what’s happening around the world, I can see why. But I do not think TEG is a sell at this point. It — and other utilities like it — remain solid income plays in the current market.
Nilus
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Nylus,
If earnings fell short and are likely to continue to decline, where is the income going to come from to keep the nice dividend? I am afraid a dividend cut is in eminent, unless there is something I am missing.
Hi, Ingrid. TEG is certainly stretched thin as far as future dividends are concerned. Their payout ratio is hovering around 100%, meaning at the current dividend rate — based on their projected earnings — they will be paying out everything and then some.
Clearly not sustainable in the long-term.
On the other hand, if they are able to divest the non-regulated businesses (big IF), the resulting cash could be used for payments to shareholders. In addition, earnings would become more predictable (albeit at a possibly lower level) and that would also make the dividend a bit safer.
Bottom line: I think there is more risk in TEG right now than the other utilities I’m recommending. But the company also has a tremendous history of payments, and it seems as though the company is making the painful (though appropriate) decision to shed pointless business units.