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Wednesday, August 17, 2011

Vectren Corporation (VVC) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Vectren Corporation (VVC). Below are some highlights from the above linked analysis:

Company Description: Vectren Corp. is an energy holding company that delivers gas and/or electricity to more than one million utility customers in Indiana and Ohio, and offers other energy related products and services.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

VVC is trading at a premium to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $25.34. VVC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

VVC earned one Star in this section for 3.) above. The company has paid a cash dividend to shareholders every year since 1946 and has increased its dividend payments for 52 consecutive years. VVC earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

VVC earned a Star in this section for its NPV MMA Diff. of the $610. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as VVC has. The stock's current yield of 5.5% exceeds the 4.1% estimated 20-year average MMA rate.

Memberships and Peers: VVC is and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Avista Corp. (AVA) with a 4.7% yield, Dominion Resources, Inc. (D) with a 4.1% yield and SCANA Corp. (SCG) with a 5.2% yield.

Conclusion: VVC earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks VVC as a 3 Star-Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $45.40 before HGIC's NPV MMA Differential inrcreased to the $1,000 minimum that I look for in a stock with 25 years of consecutive dividend increases. At that price the stock would yield 3.26%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 0.5%. This dividend growth rate is below the 1.1% used in this analysis, thus providing a margin of safety. VVC has a risk rating of 1.50 which classifies it as a Low risk stock.

VVC's three natural gas utilities in Indiana and Ohio make up the majority of is earnings. The company also holds nonutility operations including energy marketing, coal mining, and infrastructure services accounted for the other 15% of earnings and operate throughout the U.S.

Currently VVC is the highest rated utility that I follow. At 3 Stars, it failed to earn a star for Debt To Total Capital (56%) and Free Cash Flow Payout (105%). Of the two I am more concerned with the free cash flow payout. However, this is not an unusual position for utilities. It is common for utilities to issue debt and stock to make up operating cash short falls. VVC is currently trading below its calculated fair value of $25.34.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: [VVC] [AVA] [D] [SCG]

4 comments:

  1. Interesting that cash flow payout is more than 100%. Why do you think that is? Is it temporary? I am a Vectren customer so I read this with interest. It is summer now, and my bill is a lot lower since I don't use any gas for heating.

    ReplyDelete
  2. cashflowmantra: High payout ratios and negative cash flow are common with utilities. Take a look at this article for more info:

    http://www.dividend-growth-stocks.com/2010/03/increasing-dividend-yield-part-i.html

    Best Wishes,
    D4L

    ReplyDelete
  3. Hmmm, interesting article D4L. How do you decide which one to buy and keep? Seems like utility should be avoided like a plague.

    ReplyDelete
  4. Roqun: I only make new purchases in my high-risk, high-yield portfolio.

    Best Wishes,
    D4L

    ReplyDelete

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