Investing in utility stocks is usually a boring event, with the spotlight normally shining on reliable quarterly dividend payments. New developments at SCANA Corporation (NYSE: SCG) have been anything but mundane. Dominion Energy could be the company’s shining star, but not if the government has its way.
For this reason, investors may be better off putting their money in high-yielding Duke Energy Corporation (NYSE: DUK) or PPL Corporation (NYSE: PPL).
What Does The Future Hold?
SCANAhasn’t really gotten great news. Its project was hit with cost overruns and delays, and this led to a lot of bad press and growing relationship with key stakeholders that became tense. That resulted in SCANA halting nuclear construction altogether.
Without regulatory relief, SCANA could have a difficult time staying viable thanks to the debt related to the now-canceled nuclear plant. It has already been mandated to cut its dividend by 80%. Bigger utility company Dominion Energy has jumped into the outer margins, offering to buy SCANA, but the deal needs approval.
The issue is that some stakeholders are complaining about the deal. So the best outcome is that SCANA gets brought into the fold of Dominion. The worst case is investors will own a very troubled utility that may not survive its nuclear issues.
This is where Duke Energy enters stage left. This utility dropped its nuclear plans before they fell apart and took the company with it. Furthermore, the construction troubles it had at a clean coal plant are now in the rearview mirror. In fact, it has revamped its entire business in recent years, shedding carbon-based retail power assets and foreign operations, picking up a natural gas utility, and growing its reach in renewable power.
It has plans to spend roughly $37 billion across its various businesses between 2018 and 2022. This spending, roughly 90% of which will be on regulated assets, should help it get approval for rate hikes and support the company’s projection of 4% to 6% annual earnings and dividend growth over that span. That’s not exciting, but it’s got a high chance of hitting these targets since the spending is for necessary upgrades and equipment that are not controversial in any way. And with a strong 4.4% yield, investors are getting an above market yield backed by what should be inflation-beating dividend growth.
But there’s more and it deals with currency fluctuations that are likely to wash out over the long term. And the added diversification of the UK assets could be viewed as a net positive as the energy sector continues to evolve — note that oil giants Total and Royal Dutch Shell have been investing in electric assets lately. And those pesky coal plants, well, they need to be replaced over time, which is exactly the type of spending that regulators like to see when considering rate hikes. So far from being a negative, the company’s need to upgrade its asset base should probably be seen as a net positive.
The dividend, meanwhile, should continue to expand, though only in the low single digits. However, over the last decade, annualized distribution growth has basically kept pace with the historical average for inflation growth, ensuring that investors’ buying power hasn’t been eroded. Investors looking to maximize current income should do a deep dive at PPL.