The shareholder-owned electric utility industry extended its near-decade-long trend of widespread dividend increases during Q2. Nine of the 50 publicly traded companies tracked by the Edison Electric Institute raised their dividend, resulting in a total of 28 that either raised or reinstated their dividend during the first six months of the year. The period’s total mirrored that of last year and remained at the high end of the 23 to 28 range that has held since 2004.
The total of 37 companies that raised or reinstated their dividend during the full 2012 calendar year was also at the top end of the 32 to 37 range of the previous three years. While 2012’s total was a step down from 2007’s 43 companies, it remained well above the 27 companies that raised or reinstated their dividend in full-year 2003.
The percentage of companies that raised or reinstated their dividend in 2012 was 73%, up from 58% in 2011 and 60% in 2010. The 2012 result is the highest on record, based on data going back to 1988. The 15% dividend tax rate has supported the high number of increases in recent years.
At June 30, 2013, all 50 publicly traded companies in the EEI Index were paying a common stock dividend. Table I shows the industry’s dividend paying patterns over the past 13 years. Each company is limited to one action per year. For example, if a company raised its dividend twice during a year, that 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.
What Your Peers Are Reading
The industry’s average dividend increase during the first half of 2013 was 4.6%, with a range of 1.2% to 13.8% and a median increase of 3.6%. PNM Resources (+13.8% in Q1), NV Energy (+11.8% in Q1) and NextEra Energy (+10.0% in Q1) posted the largest percentage increases.
PNM Resources, based in Albuquerque, increased its quarterly dividend from $0.145 to $0.165 per share. The company said its board plans to review the dividend again later this year, and is considering a comparable increase in December to move the dividend into the company’s targeted 50% to 60% payout ratio range.
Headquartered in Las Vegas, NV Energy increased its quarterly dividend from $0.17 to $0.19 per share. The company led the industry with a 30.8% dividend increase in 2012. With the latest increase, NV Energy’s dividend has risen by 138% since reinstatement in July 2007 at $0.08 per share.
NextEra Energy, located in Juno Beach, Fla., raised its quarterly dividend from $0.60 to $0.66 per share. The dividend is consistent with the company’s plan, announced last year, to target a 55% payout ratio in 2014. The plan is premised on a continuing shift in the company’s portfolio mix toward more regulated and long-term contracted assets.
Chicago-based Exelon lowered its quarterly dividend by $0.215 per share, or 41.0%, from $0.525 to $0.31, effective in Q2. Exelon said the lower payout allows it to maintain its investment-grade credit rating. The company also said the decision to cut the dividend was driven, in part, by expectations that low U.S. power prices would continue longer than previously expected.
Payout Ratio & Dividend Yield
The industry’s dividend payout ratio was 62.8% for the 12 months ending March 31, 2013, surpassing all other U.S. business sectors. (The industry’s payout ratio was 61.1% when measured as an un-weighted average of individual company ratios; 62.8% represents an aggregate 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 2012, the annual payout ratio ranged from 62.0% to 69.6%, with the highest result coming 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:
- Non-recurring and extraordinary items are eliminated from earnings.
- Companies with negative adjusted earnings are eliminated.
- Companies with a payout ratio in excess of 200% are eliminated.
The industry’s average dividend yield was 3.9% on June 30, 2013. This was higher than all other business sectors except the broader Utilities sector (consisting of electric, gas and water utilities), which yielded an average of 4.0%. The industry’s yield was 3.9% on March 31, 2013, 4.3% at year-end 2012, 4.1% at year-end 2011, 4.5% at year-ends 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 50 publicly traded EEI Index companies’ yields.
The strong dividend yields prevalent among most electric utilities have helped support their share prices in recent years, especially given the period’s historically low interest rates. The EEI Index rose by a modest 2.1% in 2012, following returns of 20.0%, 7.0% and 10.7% in 2011, 2010 and 2009, respectively.
The Mostly Regulated company category had the highest dividend yield by category on June 30, 2013, at 4.0%, compared to the Regulated category’s 3.9% and the Diversified’s 2.7%. Note that Diversified category metrics have become less meaningful indicators of broad industry trends in recent years since category membership has fallen to a single publicly traded company, as industry business models migrate back to a Regulated emphasis.
The yields for all three categories are below their levels at December 31, 2012, when the Regulated, Mostly Regulated and Diversified yields were 4.2%, 4.4% and 4.0%, respectively. The EEI Index gained 10.8% for the six months ended June 30, 2013, resulting in the lower yields.
The Mostly Regulated group recorded a dividend payout ratio of 68.3% for the 12 months ended March 31, 2013, compared to 58.7% for the Regulated group and 32.2% for the Diversified group. The Regulated group has typically produced the highest annual payout ratio, having done so in 2010 and 2011 and each year from 2003 through 2008. It was exceeded by the Mostly Regulated group in 2009 and again in 2012.
Fourteen of the industry’s publicly traded companies repurchased an aggregate $821 million of common shares during 2012 as an alternate way of returning cash to shareholders. Share repurchases were $1.8 billion in 2011 and ranged from $908 million to $2.7 billion over the 2008 through 2011 period, after falling sharply from $11.9 billion in 2007.
The 2007 repurchases were 90% higher than the $6.3 billion spent in 2006. 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 Flow
The industry’s aggregate free cash flow deficit continued in early 2013, with negative $8.5 billion in Q1 compared to negative $7.9 billion in Q1 2012. Calendar-year free cash flow was negative $26.7 billion in 2012, down from the negative $13.5 billion in 2011, marking the eighth consecutive year of deficits.
The vast majority of the decline is due to an $11.9 billion, or 15.1%, increase in capital expenditures. Common dividends paid increased $1.2 billion, or 6.0%, while net cash provided by operations was nearly unchanged.
The industry’s capital spending remains historically high due to elevated levels of investment in environmental compliance, transmission and distribution upgrades, and new generation capacity. While some analysts define free cash flow as the difference between cash flow from operations and capital expenditures, we also deduct common dividends due to the utility industry’s strong tradition of dividend payments.
EEI’s latest projections for industry capex are $95.3 billion in 2013, $92.0 billion in 2014 and $85.0 billion in 2015. These figures are based on a review of the latest capex projections for our entire universe of companies.
Total aggregate industry-wide cash dividends paid to common shareholders rose by $227 million, or 4.5%, in Q1 2013 compared to the year-ago period. On a calendar year basis, dividends increased by $1.1 billion, or 6.0%, to $20.5 billion in 2012 from $19.3 billion in 2011. From 2003 through 2012, total industry-wide cash dividends rose 66%, to $20.5 billion from $12.3 billion.
Legislation & Dividend Tax Rates
On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, which forestalled imminent federal spending reductions commonly referred to as the “fiscal cliff.” As part of this legislation, dividend tax rates (which would have reverted to ordinary income tax levels in 2013) were kept low and permanently linked to tax rates for capital gains.
The top rate for dividends and capital gains is now 20% for couples earning more than $450,000 ($400,000 for singles). For taxpayers below these income thresholds, dividends and capital gains continue to be taxed at the current rates of 15% and 0%, depending on a filer’s income level. Starting in 2013, a 3.8% Medicare tax that was included in the 2010 health care legislation will be applied to all investment income for couples earning more than $250,000 ($200,000 singles).
Continued low dividend tax rates remain an important element of the industry’s ability to attract capital for investment in emissions reduction, new transmission lines, distribution upgrades, and new generation in the years ahead. Notably, parity between dividend and capital gains tax rates was preserved, thereby not creating a disadvantage for companies that rely on a strong dividend to attract investors.
The reduced dividend tax rate has certainly supported utility stock returns over the past decade. From July 1, 2003, through June 30, 2013, the EEI Index of U.S. shareholder-owned electric utilities generated a total return of 160% compared to 114% for the Dow Jones Industrial Average and 102% for the S&P 500.