Today I revisit First Energy (FE) for the second time. This is the thirteenth article out of fifteen covering the stocks that Seeking Alpha contributor Insider Monkey recommended a few weeks ago. Most of the stocks on his list were yielding between 4% to 5%, so they are potential 6% high dividend stocks when the market slides due to a second worldwide recession. I’m trying to find the ones with high dividends, earning power, and strong balance sheets. First Energy looks promising in the $30 - $32 price range, but I have some concerns over the sustainability of their dividend. Read on to see how I came to that conclusion.
First Energy (FE)
Price: $44.15
Shares: 418.22 million
Market capitalization: $18.46 billion
Preferred stock: none
Bonds: $4.7 billion. The bonds don’t appear to be a threat to the dividend anytime soon.
DIVIDEND RECORD: First Energy (FE) has paid a dividend since at least 1998. It paid $0.38 quarterly in 1998. It has grown the dividend to $0.55.
Dividend: $0.55 quarterly
Dividend yield: 4.98% ($2.20 annual dividend / $44.15 share price)
Dividend payout: 91.6% ($2.20 annual dividend / $2.40 recent EPS on Google Finance) OR 86.9% ($2.20 annual dividend / $2.53 avg. adjusted earnings)
Share price for 6% dividend yield: $31.66 ($2.20 / 0.06)
EARNING POWER: $2.53 @ 418.22 million shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2007 | $4.22 | $1,309 M | 310 M | $3.13 |
2008 | $4.38 | $1,342 M | 307 M | $3.21 |
2009 | $3.29 | $1,006 M | 306 M | $2.41 |
2010 | $2.42 | $742 M | 305 M | $1.77 |
2011 | $2.21 | $885 M | 418.22 M | $2.12 |
Five year average adjusted earnings per share is $2.53
Consider contrarian buying below $20.24 (8 times average adjusted EPS)
Consider value buying below $30.36 (12 times average adjusted EPS)
First Energy (FE) is currently trading at 17.45 times average adjusted EPS. This is stock is priced for investment, but it is getting close to speculative.
Consider speculative selling above $50.60 (20 times average adjusted EPS)
BALANCE SHEET – Why can’t this company reduce liabilities in order to gain equity.
Book value per share: $31.75
Price to book value ratio: 1.39 (under 1.0 is good)
Current ratio: 0.69 latest quarter (over 2.0 is good) Little current assets to cover this year’s liabilities.
Quick ratio: 0.04 latest quarter (over 1.0 is good) Almost no cash to cover this year’s liabilities.
Debt to equity ratio: 2.20 (lower is better) Lots of debt to equity.
Percentage of total assets in plant, property, and equipment: 64.1% (the higher the better) Current assets account for 7%, intangibles 13.6%, other long term assets 15.2%. Find out what the intangibles and others are before you invest.
CONCLUSION – As usual, the best time to buy First Energy (FE) in recent years was in March 2009. It was a value investment back then. First Energy is a steady dividend payer and moderate grower. I’m concerned that the company doesn’t have the earning power to keep up with a growing dividend payment. The company is still priced for investment at this time, but it is much closer to speculative pricing than value. Start scaling out of it when the price hits $50.60. The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios. The company is going to have to issue more debt or stock to finance its current operations. You can safely ignore this stock until it drops back to the $30.00 - $32.00 range where the dividend yield climbs above 6% and the price to book value ratio approaches 1.0.
DISCLOSURE – I don’t own First Energy (FE).
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