One of the problems with investing in a certain style, like dividend investing, is that you'll end up owning a lot of stocks from the same sectors. That's where I found myself with the utility sector. I decided to hold off on any more stocks in the space until WEC Energy(NYSE: WEC) popped up on my radar screen. The story was so good that I couldn't say no and I bought it. Here's why.
What does WEC Energy do?
For the most part, WEC is a run-of-the-mill utility. It provides regulated natural gas and electric services to around 4.7 million customers in parts of Wisconsin, Illinois, Michigan, and Minnesota. It isn't exactly a small utility, but with a market cap of $26 billion, it isn't in the top tier of the utility sector, either. For reference, NextEra Energy is an industry giant with a market cap of $150 billion and Southern Company, a well-known and respected industry leader, has a market cap of roughly $90 billion.
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As a regulated utility, WEC has been granted a monopoly in the markets it serves. In exchange, it has to get its rates and spending plans approved by the government. This is not a recipe for a fast-growing company, rather utilities like WEC tend to be slow and steady performers. And utility stocks also tend to pay reliable dividends. For its part, WEC has increased its dividend annually for 21 consecutive years.
Why did I buy WEC Energy?
The first thing that drew me to WEC Energy was its dividend yield, which was roughly 4% at the time I bought it. The stock has risen a bit since my purchase, but the yield is still hovering around the 4% mark. That is the number that attracts my attention to stocks in general, but I usually dismiss most stocks pretty quickly. I couldn't do that with WEC Energy, at least partly because of the long history of dividend increases. But also because the yield is near the highest levels in a decade. That combination suggests that this is a good company trading at an attractive price.
Digging in a little further I noted that the dividend has grown at an average annualized rate of 7% over the trailing three, five, and 10 years. That's an impressive rate of growth for a boring utility, noting that NextEra Energy's dividend growth rate is around 10%, but it is a combination of a regulated utility and a fast-growing renewable power business. NextEra Energy's dividend yield is also notably lower at just 2.7%.
I'm a conservative investor, so more yield, nearly as strong dividend growth, and a really boring business is right up my alley. It was time to dig in and try to find a reason to not buy the stock.
What's wrong with WEC Energy?
I believe there are two big negatives for WEC Energy. The first is industrywide and that's rising interest rates. Like all utilities, WEC Energy's business is capital intensive and, thus, it tends to make heavy use of debt. Higher rates will make it more costly to service that debt. However, regulators generally take such issues into consideration when setting rates, so I don't see this as a long-term problem. It might be a near-term headwind, but over time it will work itself out.
However, specific to WEC Energy, is an adverse rate ruling in Illinois that required the utility to effectively stop work on its natural gas network in the state. Regulators are examining the role of natural gas in the state and the best way forward with regard to replacing older infrastructure. It seems likely that an equitable comprise will be reached, it will just take some time. But investors don't like uncertainty, and when combined with rising interest rates, Wall Street has taken a downbeat view of the company's future for now.
WEC Energy looks like it still has a good future
So the two biggest problems I see are both likely to be temporary, which helped me get over the concerns I had here. Meanwhile, I'm buying a reliable dividend growth stock with a historically high yield. And, to add to the allure, management has a $23.7 billion capital investment plan that it believes will allow for earnings growth of between 6.5% and 7% a year, with the dividend likely to increase along a similar path. In other words, management is still very optimistic about the future. That was enough for me to hit the buy button. There's still time if you want to follow suit.
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Reuben Gregg Brewer has positions in Southern Company and WEC Energy Group. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
