WEC Stock – A Steady Eddie for your investments!
Being a conservative income investor, for the most part, I love those steady performers in my investment portfolio.
And I definitely consider Wisconsin Energy Group (NYSE: WEC) just that.
So let’s pull back the covers on this Dividends Deluxe model portfolio favorite and see what we can find out about WEC stock, and the WEC stock dividend. But first, let’s see what this company does to make money.
WEC COMPANY BACKGROUND
As noted above Wisconsin Energy Group stock trades on the New York Stock exchange using the ticker symbol WEC. Throughout this article, I will refer to the company as WEC and to its stock as WEC stock.
WEC, a Fortune 500 company, is one of the largest electric generation, distribution and natural gas delivery holding companies in the United States. They provide energy services to more than 4.5 million customers in Wisconsin, Illinois, Michigan, and Minnesota.
- 70,100 miles of electric distribution lines
- 50,000 miles of natural gas transmission lines
- 7,300 megawatts of power plant capacity
WEC OPERATING UNITS
WEC does business through a number of energy companies and subsidiaries that include:
- We Energies – Delivers electricity and natural gas to more than 2.2 million customers in Wisconsin
- Wisconsin Public Service – Delivers electricity and natural gas to more than 776,000 customers in Wisconsin
- Peoples Gas – Delivers natural gas to more than 869,000 customers in the city of Chicago
- North Shore Gas – Delivers natural gas to more than 162,000 customers in Chicago’s northern suburbs
- Minnesota Energy Resources – Delivers natural gas to more than 238,000 customers in Minnesota
- Michigan Gas Utilities – Delivers natural gas to more than 178,000 customers in Michigan
- Upper Michigan Energy Resources – Delivers electricity and natural gas to more than 42,000 customers in Michigan’s Upper Peninsula
- Bluewater Gas Storage – Provides natural gas storage and hub services to 1.4 million natural gas customers of We Energies and Wisconsin Public Service
- W.E. Power, LLC – Designs, builds and owns modern, efficient power plants that are leased to We Energies
- WEC Infrastructure LLC – Holds ownership interests in wind generating facilities that have long-term offtake agreements for the energy they produce
Having lived in the Midwest my entire life, I have been a customer of several of WEC’s energy companies. And I have been an owner of WEC stock since 2017.
WEC IS A REGULATED UTILITY
More than 80% of earnings come from constructive Wisconsin and Federal Energy Regulatory Commission regulation. I cover regulated utilities frequently on Dividends Diversify, so what exactly does it mean?
Well, I was recently reading one of my longtime favorite investment newsletters called Utility Forecaster edited by Robert Rapier. He explained what a regulated utility is. And he did it in pretty simple terms.
A REGULATED UTILITY IS…
Here is Mr. Rapier’s explanation…
Most of the U.S. gas and electric utility industries are regulated to some degree. In regulated markets, these utilities have a monopoly. The rates they can charge are approved and regulated by state regulatory authorities.
In a regulated market, a regulated utility can own and operate the entire value chain, from generation through the transmission to customers. Regulated utilities have less exposure to market volatility because they can request a rate increase if market conditions dictate the need.
On the other hand, during times of high power demand, regulated businesses will be at a competitive disadvantage to deregulated businesses that can charge market prices.
For investors, a major appeal of regulated utilities is higher predictability and lower risk. If a regulated utility needs to raise rates to earn an acceptable return, it will make that case to the regulatory authorities for approval. This is known as a rate case, and regulated utilities go before state regulators to make these cases all the time.
WEC REGULATED BUSINESS BREAKDOWN
Finally, WEC’s regulated business breaks down in several pieces as indicated in the charts below. Most of their business is regulated by the states of Wisconsin and Illinois. 14% is regulated at the national level by the Federal Energy Regulatory Commission known as FERC.
Source: WEC Investor Book
Now that we know a little bit more about WEC and regulated utilities, let’s look at the WEC stock dividend.
WEC STOCK DIVIDEND YIELD
WEC stock pays an annual forward dividend of $2.36 per share. Based on the recent stock price, the dividend payout puts the WEC stock dividend yield at 3.0%.
The yield is a little low for a regulated utility. But it is right in my target range between 3-5%.
WEC STOCK DIVIDEND GROWTH
|1 Year||3 Years||5 Years||7 Years|
Based on the chart you can see WEC stock dividend growth is quite attractive. 2019 was no exception. Management announced another 6.8% increase. This latest WEC dividend increase ran its consecutive annual increase streak to 16 years.
Looking forward, WEC management provides the following guidance on WEC dividend growth:
- Continuing to target dividend payout of 65-70 percent of earnings
- Projecting dividend growth in line with earnings growth
And management expects earnings to grow 5-7% annually for the foreseeable future. So now our WEC dividend picture becomes clear. Specifically,
- 3% current dividend yield
- 6% projected dividend growth
I really like it when company management provides clear guidance about earnings and dividend growth. As we know now, predictability is one of the advantages of investing in regulated utilities.
Revenue grew rapidly in 2015 and 2016. This was primarily due to the acquisition of Integrys Energy that closed in June 2015.
Otherwise, revenue growth is constrained by the growth of the economies in which the company operates. This will keep organic revenue growth in the 1-3% range during most years.
WEC STOCK DIVIDEND AND EARNINGS PER SHARE
Note that 2017 earnings were normalized to take out the one-time accounting benefit from the new corporate tax law.
With that adjustment accounted for, you can see WEC’s earnings trend is, well Steady Eddie. And consistent with management’s stated intentions, the WEC dividend payout ratio is running at about 66%.
WEC CREDIT RATING AND BALANCE SHEET
The company holds public debt across a number of its operating units. And S&P Global
Source: WEC Investor Book
WEC’s debt to equity profile is a very comfortable 1.2 to 1. So, it appears that the company’s credit ratings and balance sheet are very strong.
WEC STOCK VALUATION MODELS
Let’s judge value in several ways:
- Dividend Discount Model
- Price to earnings ratio
- Utility Forecaster buy target
- Morningstar fair value estimate
Dividend Discount Model Value for WEC Stock
The single stage dividend discount model considers several factors I have discussed thus far.
• Current dividend payment – $2.36 per share
• Projected dividend growth – 6%
• My desired annual return on investment – 9.5%
Using these assumptions, the dividend discount model puts the value of WEC stock at $71 per share.
WEC Stock Price to Earnings Ratio
The WEC stock price to projected fiscal 2019 earnings is 22 times. To compare, the S&P 500 forward price to earnings ratio for 2019 is 16 times.
WEC stock is clearly very expensive on this basis. But predictable earnings and dividends usually come at a premium price.
Morningstar WEC Stock Fair Value
The investment analysis firm Morningstar believes WEC stock is fairly valued at $66 per share.
Utility Forecaster WEC Stock Buy Target
Utility Forecaster has a buy target on WEC stock of $70 per share.
WEC STOCK VALUATION CONCLUSION
We have a range of valuation from these different sources. Every measure shows WEC stock to be overvalued at the current price level.
WEC STOCK AND DIVIDEND ANALYSIS – CONCLUSION
WEC has a small position in my dividend growth stock portfolio. I only wish I owned more. But I’m not willing to add on at current prices.
WEC can be a very steady stock to add to an investment portfolio. It has a nice combination of current dividend and moderate but predictable dividend growth.
Give me a correction in the stock price and I would love to add to my position at $70 per share or less.