Friday, October 24, 2014

Recent Buy: AVA

Oct 22, 2014: Bought 75 shares of AVA at $34.12 per share.

Incorporated in 1889 and headquartered in Spokane, Washington, Avista Corporation (AVA) is a diversified energy company engaged in the generation, transmission and distribution of energy in North America. Avista Utilities is an operating division of AVA that comprises of its regulated utility operations. It serves customers in Washington, Idaho and Oregon and contributes over 90% of earnings. In July 2014, AVA acquired Alaska Energy and Resources Company.

AVA is a Dividend Contender with a 12-yr streak of dividend increases. It pays quarterly dividends in March, June, September and December. Initial yield on cost is 3.72%. For a company in the Utilities sector, AVA has a solid 5-year dividend growth rate of 12.07%.

The stock has closely tracked the performance of the S&P over the past 10 years, though a recent spike pushed AVA ahead by about 18%. as is evident in the graph below. AVA has a 5-year Beta averaging about 0.68.


Analysis of AVA


My fair value estimate of AVA is $34.74, so I'm buying shares at a small discount of about 2%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.


AVA passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (12 years)
  • Dividend yield exceeds 2.75% (3.72%)
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 12% (15.80%)
  • Price to earnings ratio (P/E) is less than 20 (TTM 15.29x and Forward 15.61x)
  • 5-year CAGR is at least 10% (12.07%)
  • Reasonable confidence in continued dividend growth (Yes)
AVA fails the following of my selection criteria:
  • Earnings per share (EPS) percentage payout is less than 40% (62.87%)
  • Debt to equity ratio is below 50% (105%)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (3.02)
  • Price discount is at least 5% of fair value estimate (1.79%)
Based on these statistics, AVA earns 4 out of a possible 7 stars: (****---)

The following chart shows AVA's dividend payments and earnings per share over the last 10 years. AVA has grown its dividend steadily and the EPS growth, though somewhat more sporadic, is trending up:


Other ratings for AVA


 Zacks Rank  3-Hold
 Thomson Reuters StockReport+   (10/10) Positive 
 The Motley Fool's CAPS Rating  (****-)

Concluding Remarks


AVA repeated as the top candidate in the Utilities sector on my October dashboard of dividend growth candidates. Also, AVA was one of the two Utilities sector stocks in The Bloggers' Dividend Growth Portfolio, a portfolio compiled from the most popular dividend growth stocks held in 61 public portfolios of DGI bloggers in my blogroll. Since I'm currently underweight in utilities, AVA looks like a good addition here!

The company has an attractive mix of electricity generation resources, including 48% from renewable hydropower and 35% from natural gas. As such, it is one of the greenest utilities in the United States.

Based on a recent presentation, AVA is projecting earnings growth of 4% to 5% and expects dividend growth to keep pace with long-term earnings growth. In August, the company raised consolidated earnings guidance for fiscal year 2014 to a range of $3.00 to $3.20 per diluted share, expecting to be in the upper end of the range.

In 2014, AVA has made some strategic moves to reshape its business, including disposing of Ecova and acquiring Alaska Energy and Resources Company (AERC). A consequence of the Ecova disposition is the initiation of a stock buyback of up to 4 million shares. On the other hand, the AERC acquisition was accompanied by an issuance of 4.5 million new shares of common stock.

A recent report suggests that AVA may be talking to potential buyers, including Berkshire Hathaway Inc. One of my rejection criteria is to avoid purchasing shares of a company that will be acquired by or merged with another company. However, the report is speculative and I'm comfortable buying shares of AVA at this time.

75 shares of AVA adds $95.25 of expected dividend income, increasing DivGro's projected annual dividend income to $5,087.63.

Thanks for reading! Do you own shares of AVA? Which other Utilities stocks do you own?  

10 comments :

  1. Solid buy. A great slow and steady core holding.

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    1. Yeah, I like AVA here... even if dividend growth goes down to about 4.5% (based on projected earnings growth), the yield on cost of 3.72% puts me above 8% (Chowder rule for Utilities). As you say... a slow and steady core holding!

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  2. Looks to be a pretty safe buy, especially for a utility. I like there tremendous exposure to renewable energy, as that should hold up well over time, regardless of the prevailing energy source the rest of country prefers. Given the growth they've had recently, I would expect them to level out as you've suggested. Something to potentially add to the watch list. I currently don't hold any utilities and unless one jumps out at me, they aren't in the short list for stocks to add just yet. A year or two more of building my DG portfolio will likely see a change to that.

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    Replies
    1. My only slight concern is that it could be a takeover target. If that happens, I'll move right along. You're right about the growth. In the regulated environment they're in, utilities just don't grow faster than about 5% a year. The fact that AVA has a 5-yr CAGR of 12% is remarkable. I expect that to go down, though, to something more in line with earnings growth.

      I'm almost done diversifying DivGro; perhaps 1 or 2 more Utilities to go and a few singles in other sectors... Good luck with expanding your portfolio!

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  3. Ferdi,

    Like the buy. I bought AVA quite some time ago, and I've been a happy shareholder thus far. It doesn't rock the boat too much, and the dividend increases have been fairly consistent.

    I'm not a huge fan of the utility sector in general, as I think many of the stodgy old utilities have a lot of headwinds. Plus, many of the stocks are overvalued here. But I like AVA's green angle and their consistency.

    Happy to have you on board. :)

    Best wishes.

    ReplyDelete
    Replies
    1. Hi Jason!

      I'm with you -- I really like that nearly half of AVA's energy comes from hydro.

      Utilities are generally challenged because they operate in a regulated environment. They have to negotiate with commissions on rates and rate increases. So growth is constrained. On the other hand, they are more stable for the very same reason. I can tolerate a few Utility stocks in my portfolio (to offset my riskier holdings like SDRL and PMT :-), but I wouldn't want too many of them.

      Thanks for visiting, and take care!

      Delete
  4. Ferdi - I was not familiar with AVA before your post but looks like a solid company to own. 12 years of dividend increase, a payout ratio of 39%, and a current P/E of 11, sounds like you picked up a winner!

    Thanks for sharing your purchase...I will be adding AVA to our watch list. AFFJ

    ReplyDelete
    Replies
    1. I've been eyeing it since it first appeared as a sector winner in my monthly picks in September, I believe. Five of the public portfolios in my blogroll own AVA (see my post on the Bloggers' Portfolio).

      For a Utility, I think AVA is a good choice.

      Thanks for stopping by!

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  5. Have you considered other utilities such as ED, D or SO. I currently have those three in my portfolio and have also added utility CEFs on my watch list last month. Take a look at DNP, UTG and HE as well. Thanks for sharing.

    ReplyDelete
    Replies
    1. ED is not in my watch list (if fails the chowder rule). D and SO are, though, so I'll take a look at those. Currently, I don't consider CEFs. Seems like many of them pay monthly dividends, though some do not seem to be increasing their dividends over time.

      Thanks for sharing these stocks!

      Delete

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