Limit Order Executed + Investment Thesis – Xcel Energy Inc. (XEL) – $48.00 per share

This trade was actually executed on Tuesday 12/26/17. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

In case you missed it, I’m making it a point to twitter all my trades as they happen and this was no exception.

I have updated the portfolio and income tracker pages to reflect this position.

Dividend Cycle

XEL went ex-dividend the day after this trade was executed, which is pretty awesome. That means I get to enjoy the $0.36/share distribution immediately. Well as immediately as it gets…the distribution doesn’t pay till Jan20.

This payment is probably going to be the last one at $0.36/share. XEL is due for an increase in Q1 2018. The company boasts dividend contender status, having given shareholders a raise for 14 consecutive years.

Investment

I purchased 40 shares at $48.00/share plus a $6.95 trade commission, which works out to a total investment of $1,926.95 (hence the $48.17375/share price mentioned in my tweet). This purchase was made in my ROTH IRA.

Based on the current dividend, my projected annual income is increased by $57.60, although as I mentioned already, I’m hoping that will go up pretty soon.

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

60.9%, N/A (negative FCF)

10 Year Revenue CAGR

1.07%

10 Year EPS CAGR (5 Year EPS CAGR)

6.37% (3.89%)

5 Year ave P/E – Current P/E (ttm)

17 – 20.5 = -3.5

5 Year ave Yield – Current Yield  

3.6% – 3.0% = +0.6%

10 year mean DGR (dividend growth rate)

4.4%

Debt/Market Cap

$15.39B/$24.26B = 63.4%

Total Cash

$174.82M

Return on Assets

3.37%

Return on Equity

10.58%

Profit Margin

10.4%

EBITDA/Revenue

$3.79B/$11.4B = 33.2%

Reverse DDM Fair Value DGR

7%

Assumed DGR (DDM valuation 10% disc.)

5% ($28.8)

DGR Margin of Safety

-2.0%

Dividend Cushion Ratio (6.98% DGR)

-3.85

Cash from Ops “cushion”

+142.15%

Capex “cushion”

-127.81%

DGR “cushion” (delta)

N/A (negative cushion)

Note: Quantitatively this investment violates a lot of my rules, as indicated by all the red flags above. That has a lot to do with the fact that XEL is a utility company, and virtually every utility company in existence violates my quantitative investment criteria. They’re leveraged to the hilt, and their growth prospects are limited by regulation.

LOL (Limit Order Logic)

At $48/share my purchase price represents exactly a 3% yield, which kind of has a nice ring to it. Honestly, it’s probably not cheap enough, but I’ll be the first to admit that I was a little impatient. I’d much prefer a price around $36/share, but it hasn’t been that low for 2 years.

$48 probably represents near-term resistance, and at least had a chance of getting filled, which it did.

QWaF (Qualitative Warm and Fuzzy)

I guess this falls under the investment strategy of investing in companies that you use, except we don’t have a choice. Xcel enjoys a regulated monopoly over providing gas and electric services in Denver. I guess they do a fine job; our service hasn’t ever been cut off or anything.

There is something psychologically gratifying about receiving a dividend from a company that you’re forced to use. At the current dividend rate, this investment covers about one month’s energy bill per year.

Until now we haven’t owned any individual utility stocks. Mainly because their balance sheets are total garbage. I doubt I’ll own any more, but we might as well have a stake in the one that covers our area.

Which I suppose leads me to the bull case? I’m much more bullish on the middle of the country than the coasts in terms of population growth. Between the high cost of living and running out of room, the edges of this country are becoming an increasingly less appealing place to live (we left California for the interior, and are not looking back).

The only way you could possibly squint your eyes enough to justify this kind of bloated balance sheet, is if there was very healthy growth on the horizon. Utility companies grow by either raising rates or increasing the number of customers. Assuming the rate increases are fixed by regulators, population growth seems to me to be the key.

Over the next 10 years, I think more people will be moving into Xcel’s service areas than will be leaving.

So there you go.

CPR (Cold and Prickly Risks)

When you walk along a knife’s edge you risk cutting your feet. Or something like that.

Any kind of exogenic event could totally blow up a company with this precarious of a balance sheet. PCG, who was our energy provider in California, just wiped out their dividend in anticipation of potential liability for the Sonoma County fires.

A rising interest rate environment doesn’t bode well either considering how much debt they have to service.

Look this probably isn’t one of my best ideas.

But the dividend covers about one month’s worth of energy bill!

Woo hoo for psychological victories!

 

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