The shareholder-owned electric utility industry added to its eight-year-long trend of widespread dividend increases in Q2. Nine of the 52 publicly traded companies tracked by EEI raised their dividend, bringing to 29 the total number of companies that either raised or reinstated their dividend during the first six months of the year. This is the highest total for the period in recent years, rising above the 23 to 26 seen from 2005 through 2011.
For full-year 2011, the 32 companies (58% of the industry) that raised or reinstated their dividend was similar to the 34 in 2010 and 31 in 2009, and below the 37 and 43 in 2008 and 2007, but well above the 27 companies (42% of the industry) that did so in 2003. The 15% dividend tax rate has supported the high number of increases in recent years.
As of June 30, 2012, all 52 publicly traded companies in the EEI Index were paying a common stock dividend. Chart I shows the industry’s dividend paying patterns over the past 11-plus years. Each company is limited to one action per year. For example, if a company raised its dividend twice during a year, this counts as one in the Raised column. Companies generally use the same quarter each year for dividend changes, typically the first quarter for electric utilities.
2012 Dividend Increases
The industry’s average dividend increase during the first six months of 2012 was 7.6%, with a range of 0.8% to 30.8% and a median increase of 3.7%. NV Energy (30.8% in Q2), Sempra Energy (25.0% in Q1) and Northeast Utilities (aggregate 24.7% in Q1 and Q2) had the largest percentage increases.
NV Energy, based in Las Vegas, Nevada, increased its quarterly dividend from $0.13 to $0.17. The company expects the increase to result in a dividend payout ratio of approximately 50% in 2012, and said it will target a range of 55 to 65 percent in the future. With the latest increase, NV Energy has more than doubled its dividend since reinstating it in July 2007 at $0.08 per share. San Diego’s Sempra Energy raised its quarterly dividend from $0.48 to $0.60, the second consecutive large increase by the parent company of San Diego Gas & Electric. This follows a 23.1% increase last year, the industry’s third largest jump in 2011.
Northeast Utilities, headquartered in Hartford, Conn., announced back-to-back dividend increases during the first two quarters of 2011, for a total increase of 24.7%. The company’s dividend increased from $0.275 to $0.2938 per share during the first quarter, followed by another increase, to $0.343, in the second quarter. The latter was implemented as part of the merger agreement with NSTAR, which closed on April 10, 2012.
Empire District Electric, based in Joplin, Missouri, reinstated its quarterly dividend at $0.25 per share in Q1 2012. The company temporarily suspended its dividend following the devastating tornado that hit its service territory in May of 2011. Prior to the suspension, Empire District’s dividend was $0.32 per share.
The industry’s dividend payout ratio was 62.1% for the 12 months ending March 31, 2012, surpassing all other U.S. business sectors. (The industry’s payout ratio was 68.4% when measured as an un-weighted average of individual company ratios; 62.1% represents an aggregated figure).
While the industry’s net income has fluctuated from year-to-year, its payout ratio has remained relatively consistent after eliminating non-recurring and extraordinary items from earnings. From 2000 through 2011, the annual payout ratio ranged from 62.0% to 69.6%, peaking in 2009 due to the weak economy and the weather’s negative impact on earnings.
We use the following approach when calculating the industry’s dividend payout ratio:
1. Non-recurring and extraordinary items are eliminated from earnings.
2. Companies with negative adjusted earnings are eliminated.
3. Companies with a payout ratio in excess of 200% are eliminated.
The industry’s average dividend yield was 4.1% on June 30, 2012, leading all other U.S. business sectors. The yield stood at 4.2% on March 31, 2012 and 4.1% at the end of 2011, down from 4.5% at year-end 2010 and 2009 and 4.9% at year-end 2008. We calculate the industry’s aggregate dividend yield using an un-weighted average of the 52 publicly traded EEI Index companies’ yields.
The Regulated and Mostly Regulated groups had dividend yields of 4.1% on June 30, 2012, while the Diversified group yielded 3.7%. The yields for all three groups are relatively unchanged so far in 2012 and slightly below their year-ago levels. At June 30, 2011, the Regulated group yielded 4.2%, the Mostly Regulated group yielded 4.4% and the Diversified group 3.5%. The EEI Index gained 15.8% for the year ended June 30, 2012, resulting in the lower yields.
The Mostly Regulated group’s dividend payout ratio was 75.2% for the 12 months ended March 31, 2012, compared to 64.9% for the Regulated group and 71.4% for the Diversified group (see chart IV). The Regulated group typically produces the highest annual payout ratio, having done so in 2010 and 2011 and each year from 2003-2008 (it was exceeded by the Mostly Regulated group in 2009).
Fifteen of the industry’s publicly traded companies repurchased an aggregate $1.8 billion of common shares during 2011 as an alternate way of returning value to shareholders. This compares to 13 companies and $2.7 billion in 2010, 11 companies and $908 million in 2009, and a total of $2.4 billion in 2008 — all levels that were far below the $11.9 billion of 2007. The industry’s common share repurchases exceeded $6.0 billion in 2004, 2005 and 2006, after rising from only $120 million in 2003.
Free Cash Flows
The industry’s aggregate free cash flow remained in a deficit during the first quarter of 2012, at negative $7.9 billion compared to negative $2.2 billion in Q1 2011. Calendar year free cash flow was negative $14.2 billion in 2011, nearly unchanged from negative $14.4 billion in 2010, marking the seventh consecutive year of negative results. During 2011, a $6.7 billion increase in net cash provided by operating activities was offset by a $5.0 billion rise in capital expenditures.