First Look at Public Service Enterprise Group (PEG).

Today I take a first look at Public Service Enterprise Group (PEG) a regulated utility.  This is the twelfth article in a series of fifteen based on some stock recommendations from Seeking Alpha contributor Insider Monkey.  Most of his stocks had dividend yields between 4% - 5%, so those are likely high dividend stocks when the market turns down due to worldwide recession.  I want to figure out which of these will have high dividend yields, earning power, and strong balance sheets.  PEG could be a buy at a lower price.  Read on to see how I came to that conclusion.

Public Service Enterprise Group (PEG)

Price: $30.90

Shares: 505.9 million

Market capitalization: $15.64 billion

Preferred stock: none

Bonds: $1.3 billion.  The outstanding bonds do not appear to be a threat to the dividend.

What the company does – Public Service Enterprise Group is the holding company for a regulated utility (PSE&G), a merchant power generation owner (PSEG Power), and an energy investment firm (Energy Holdings). PSE&G provides regulated energy delivery services in New Jersey. PSEG Power owns and operates power plants that sell wholesale power in New Jersey, Pennsylvania, New York and Connecticut. Energy Holdings invests in energy-related assets worldwide.

Morningstar’s take - Since New Jersey regulators effectively killed a $17.8 billion merger with Exelon EXC in 2006, we think Public Service Enterprise Group continues to realize the value that Exelon sought to capture. Tightly constrained power supplies in the New Jersey and Northeast markets make those markets some of the most attractive in the United States for selling electricity that PSEG generates. The company's efficiency, financial strength, and focus provide strong investor returns even through turbulent power markets. This makes the stock one of our top utility picks at the right price for long-term investors.

DIVIDEND RECORD: PEG has been paying dividends since at least 1987 according to Google Finance.  They have been a pathetic grower.  The dividend has only grown by 9 cents quarterly in 25 years.  That equates to roughly a 1.4% annual increase which is way below the government reported price increases of 2%-3% per annum.  I don’t like it when a company can’t keep dividend increase with the understated government CPI.  Did the company really miss its dividend payment in 2009 4Q?  Or is that a Google Finance graphical artifact?  I don’t know.  Make sure you do before you invest.

Dividend: $0.34 quarterly

Dividend yield: 4.4% ($1.36 annual dividend / $30.90 share price)

Dividend payout: 49% ($1.36 annual dividend / $2.78 recent EPS IAW Google Finance) –OR- 47% ($1.36 DIV / $2.84 average earning power)

EARNING POWER: $2.84 @ 505.9 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

	EPS	Net income	Shares	Adjusted EPS
2007	$2.62	$1,335 M	509 M	$2.64
2008	$2.34	$1,188 M	508 M	$2.35
2009	$3.14	$1,592 M	507 M	$3.15
2010	$3.08	$1,564 M	507 M	$3.09
2011	$2.96	$1,503 M	505.9 M	$2.97

Six year average adjusted earnings per share is $2.84

Consider contrarian buying below $22.72 (8 times average adjusted EPS)

Public Service Enterprise Group (PEG) is currently trading at 10.9 times average adjusted EPS.  This stock is currently priced for VALUE.

Consider value buying below $34.08 (12 times average adjusted EPS)

Consider speculative selling above $56.80 (20 times average adjusted EPS)

BALANCE SHEET – Its nice to see decreasing liabilities for a change.  Most companies are gaining equity by increasing assets at a slightly higher rate than they are increasing liabilities.  The price to book value and current ratio is not good.  This is a moderate balance sheet.

Book value per share: $20.30 ($10,270 M equity / 505.9 M shares)

Price to book value ratio: 1.52 (under 1.0 is good) ($30.90 price / $20.30 BV)

Current ratio: 1.35 latest quarter (over 2.0 is good)

Quick ratio: 0.82 latest quarter (over 1.0 is good)

Debt to equity ratio: 2.94 (lower is better)

Percentage of total assets in plant, property, and equipment: 59.85% (the higher the better)  A potential investor in PEG should know why 26% of assets are categorized as “other long term assets”.  What are those?

CONCLUSION – As usual, the best time to buy PEG in recent years was in March 2009.  It was a contrarian investment back then.  Public Service Enterprise Group (PEG) is a steady dividend payer and pathetic dividend grower.  They are a regulated utility company serving some of the most socialist states in the USA.  Therefore, I don’t expect much earnings growth in the future.  The company is value priced at this time at 10.9 times average adjusted earnings.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   This stock will drop in the upcoming worldwide recession.  Buy below $20.30 when the price/book value equals 1.0.  The dividend yield will be higher than 6% below a price of $22.66.  You need that high dividend yield to compensate you for the lack of dividend growth that PEG’s historical dividend record shows.

DISCLOSURE – I don’t own Public Service Enterprise Group (PEG).

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