Articles Comments

My FI Journey » Stock Analysis » Wisconsin Energy Corp (WEC) Dividend Stock Analysis

Wisconsin Energy Corp (WEC) Dividend Stock Analysis

wisconsin-energy-logoWisconsin Energy Corp is a holding company that provides both utility energy and non-utility energy.  The major components of WEC’s regulated utility industry are Wisconsin Electric Power Company and Wisconsin Gas.  The major component of WEC’s non-regulated energy segment is We Power, which was formed to design, construct, own, and lease power generating facilities to Wisconsin Electric.  WEC also runs a small real estate business.  Currently, WEC serves approximately, 1.12 million electric customers in Wisconsin the Upper Peninsula of Michigan, more than 1.06 million gas customers in
Wisconsin, and about 460 steam customers in Milwaukee.  Approximately 50% of WEC’s power is dependent upon coal, with the other 50% coming from other sources, predominantly purchased power (35%).  Recently, WEC invested in four new electric power generation facilities and upgraded its existing facilities as well.

Wisconsin Energy Corp Basic Company Stats

  • Ticker Symbol: WEC
  • PE Ratio: 16.93
  • Yield: 3.40%
  • % above 52 week low: 78.1%
  • Beta: 0.3
  • Market cap: $9.2 B
  • Website: www.wisconsinenergy.com

WEC vs the S&P500 over 10 years

wec vs sp500

WEC has consistently outperformed the S&P500 for most of the last decade.  By the end of 2012 an investment in WEC would have increased by about 200% compared to about 75% for the S&P500 as a whole.

WEC Earnings Per Share (EPS) & Dividend Growth WEC div and eps

  • 5 year EPS growth: 11.5%
  • 10 year EPS growth: 9.6%
  • 5 year dividend growth: 22.1%
  • 10 year dividend growth: 13.0%

EPS for Wisconsin Energy have been growing steadily.  Similarly, WEC’s dividend growth has also been growing steadily.  The 10 year dividend growth rate was 13.0%, the 5 year growth rate as 22.1%, and the one year growth rate is 15.4%.  I would not be surprised if the sudden acceleration in dividend growth has now worn off and if dividend growth begins to more closely match EPS growth in the future.

With a starting yield of 3.4% and a growth rate of about 12%, WEC’s yield on cost will grow to about 10% in 10 years.  In order to double the dividend, using the rule of 72, it will take approximately 6 years.

WEC Payout Ratio

wec payout ratio

WEC’s payout ratio has remained below 50% for eight of the last 10 years. 2004 was an anomaly where it shot up past 80%, due to a reduction in EPS, likely linked to divesting itself of many of its non energy assets.  In recent years the payout ratio has been creeping up, hitting 51% in 2012.  Overall this doesn’t worry me too much, especially for a utility.

WEC Net Income and Revenue

wec net income

  • 10 year revenue growth (2003-2012): 0.6%
  • 5 year revenue growth (2008-2012): -0.8%
  • 3 year revenue growth (2010-2012): 1.0%

This is kind of a mixed bag. WEC’s revenue growth has been flat with a touch of negative.  But with the exception of the 2004 reduction, net income has been steadily increasing.  We must keep in mind that WEC is a utility and thus cannot easily expand into new markets or raise prices.  But in return for those limitations, it has monopoly status for customers within its region of operation.

WEC Balance Sheet

The current long term debt to capitalization ratio is ~54%.  This ratio has been essentially constant over the last decade.

WEC Risks

The main risk facing WEC is its heavy reliance on coal for power generation.  With over 50% of its power coming from coal plants, the stock is sensative to the price of coal.  With around 35% of WEC’s power coming from “purchased power,” WEC is also vulnerable to changes in the electric power market overall.

But it should be remembered that WEC is a utility and as such as a monopoly over power supply to customers within its region.

WEC Valuation Panel

Graham Number

The Graham number represents one very simple way to value a stock.  The Graham number for WEC is $30.87.  The current stock price is well above that, suggesting that WEC may be overvalued at the moment.

Two Stage Dividend Discount Model

Using a discount rate of 10%, the beta of 0.3, an initial dividend growth rate of 15.4% for 5 years, and a terminal dividend growth rate of 7%, the two stage dividend discount model produces a value of $34.82.  WEC still appears slightly overvalued, but changing the inputs of the model subtly, will produce different valuation numbers.

WEC Cash Secured Puts

WEC is a little too far into overvalued territory for me to risk selling a long-term cash secured put as a cash generating strategy.  But I would use short term puts as a method to initiate a position in this stock.

Conclusions

I consider WEC to be a buy, despite being slightly over valued.  As far as utilities go, WEC appears to be a solid company, with a respectable yield and dividend growth.

Disclosure: None.

Readers:  What are your opinions about Wisconsin Energy Corp?

Written by

Filed under: Stock Analysis · Tags: , ,

7 Responses to "Wisconsin Energy Corp (WEC) Dividend Stock Analysis"

  1. Thanks for the analysis. I like the company but already have money in NEE which has been a solid performer and also SO. If I was looking to add another utility then WEC would probably be high on the list.

    1. I own PPL and am looking for another utility. But utilities don’t excite me unless they’re a bit undervalued.

  2. At current levels, I think it’s a little overpriced like you said. That’s nice to see that low of a payout ratio though for a utility. I only own one, but it wasn’t one I picked. My grandfather gave me some shares back when I was in middle school and I’ve kept them ever since. I’d like to get some exposure to some utilities and WEC would be a nice one. Although I think the DG will be slowing down.

    In your DDM, why’d you use a 2% discount rate? I know that’s around what 10 year treasuries are yielding but I think in the current environment it’s better to be err on the side of caution. I usually use a 10% discount, although for a utility I’d probably drop it to around 8% since they’re typically slower growers due to the reasons you mentioned above.

    Thanks for the analysis.

    1. JC,

      I’m thinking about WEC, since I would like another utility, but I’m leaning towards waiting it out on this one and seeing if it drops in price.

      The 2% was the risk free rate. I used a 10% discount rate. For some reason I was thinking about treasuries when I was writing it up. I amended the post to clarify that. Thanks for the catch.

  3. Great analysis. I was not tracking WEC, thanks for sharing.

  4. Liquid says:

    Looks like a nice company. Everyone needs electricity so I’m pretty sure they’ll remain in power :D for the foreseeable future. I need to add some defensive companies to my portfolio so have to decide whether to add this one or a Canadian utility/energy company, most of which are more overvalued than WEC, but profits will be more tax efficient ;)

    1. I’m thinking about adding WEC, but I’d rather hold off on buying a utility until I can get it at a bit better price.

Leave a Reply

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>