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Endangered Dividends

Four Utility Stocks to Be Wary Of

By Roger S. Conrad, on Apr. 9, 2017

This article is taken from Conrad’s Utility Investor, Roger’s product specifically focused on utilities and income investing. Endangered Dividends is a regular report series that highlights companies that have at-risk dividends, allowing investors to make smart moves early. Enjoy.

PLDT (Manila: TEL, NYSE: PHI) announced a 50.9 percent cut to its semiannual dividend after its 2016 results fell short of guidance. The telecom outfit’s core earnings plunged 21 percent from year-ago levels, and its operating cash flow tumbled by 6 percent.

This reduced payout amounts to roughly 60 percent of 2016 core earnings and should be safe, especially if the company manages to deliver on management’s guidance for a 6 percent increase in net income.

Although home security, data and broadband sales were bright spots last year, PLDT continues to face several long-term challenges that keep the stock on our Endangered Dividends List.

Management has sought to counter customer attrition and declining wireless sales by investing in its network and fiber-optic connections. Unfortunately, this effort has yet to translate to stabilize revenue or stem customer attrition.

Political risk also remains elevated in the Philippines, where regulators reportedly have pressured PLDT to sell a 30 percent interest in its Smart wireless unit to the public. The government has also laid out plans for a national broadband network that could conflict with PLDT’s fiber-to-home program.

The telecom company must also contend with more than US$2 billion worth of debt maturities through the end of 2025—an amount equal to roughly one-third of its market capitalization. PLDT continues to rate a Sell.

Centrica (LSE: CNA, OTC: CPYYY) trimmed its final dividend for 2017 by enough to offset last year’s slight increase to its interim payout. As a result, the diversified energy giant will disburse the same aggregate dividend that it paid in 2016, an amount that represents an 11.1 percent decrease from 2015 and 20 percent from 2014.

For the year, Centrica grew its operating cash flow (excluding currency effects) by 14 percent, beating management’s guidance for a 3 to 5 percent increase. This outperformance reflects effective cost cutting and debt reduction.

These efforts should enable the UK energy giant to maintain its dividend for the next year or two, earning the company an escape from the Endangered Dividends List. However, Centrica still rates a Sell because of its exposure to commodity prices, the potential for unfavorable regulation and the risk of further downside in the pound.

CUI: Intelligent Investing and Utilities

FirstEnergy Corp (NYSE: FE) took a big step toward its goal of eliminating exposure to the merchant power business by mid-2018 when it took a $9.218 billion write-off on its FirstEnergy Solutions unit last month.

Management continues to wind the unit down, shuttering capacity and divesting plants when possible—for example, the company announced the sale of 1,572 megawatts of gas-fired generation and hydropower in January. If all else fails, the unit could declare bankruptcy.

Even in that worst-case scenario, FirstEnergy’s utility franchise generates enough cash flow to support the dividend, and management increased its guidance for 2017 operating earnings to between $2.70 and $3 per share. At the Edison Electric Institute’s November 2016 financial conference, management had called for this metric to range from $2.55 to $2.85 per share.

FirstEnergy’s stock trades at an undemanding valuation, but we’d like the company to make more progress on divesting its troubled fleet of nuclear power plants before we back up the truck. FirstEnergy Corp rates a Hold and escapes from the Endangered Dividends List.

Brookfield Asset Management (TSX: BAM, NYSE: BAM) stepped up to purchase 65 million TerraForm Power (NSDQ: TERP) shares from the yieldco’s bankrupt sponsor, SunEdison (OTC: SUNEQ), for $3.8 billion in cash and stock. TerraForm Power’s portfolio of solar-power assets operates under contracts with an average duration of 15 years and solid counterparties.

Having Brookfield Asset Management as a sponsor ensures TerraForm’s immediate survival and should set the stage for the resumption of a regular quarterly dividend. TerraForm Power escapes the Endangered Dividends List, but any deep-value investors should Sell and turn their paper gains into real profits.

If you’d like to read more Endangered Dividend articles and be protected against dividend cuts, subscribe to Conrad’s Utility Investor.

Roger S. Conrad is chief editor of Conrad’s Utility Investor. He co-founded Capitalist Times and Energy & Income Advisor with Elliott H. Gue.

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