Your Obama-Proof Portfolio: Edison International
Utility stocks have always been staid and dependable recession plays. The business was steady and the dividend payouts solid. But that’s changed lately. Many companies are struggling with financing, and that’s caused a string of dividend cuts. President Obama’s cap-and-trade budget, Cramer said, will only make things worse.
This cap-and-trade initiative will limit U.S. carbon emissions and auction off permits to companies that can’t meet that limit. Basically it’s a tax on emissions. Utilities that burn coal and other fossil fuels will pay the bulk of those taxes. So if investors want a good utility play, they’ll need to find one with as little carbon exposure as possible.
Cramer likes Edison International, which operates both a utility and a non-utility power-production division. The utility, Southern California Edison, accounts for 80% of sales and supplies energy to 50,000 square miles across central, coastal and Southern California, excluding Los Angeles. Edison Mission Group, the non-utility power producer, runs plants in Illinois and Pennsylvania that trade energy and related commodities and also invests in energy infrastructure projects.
But it’s SoCal Edison that’s important here. Coal, the big carbon emitter, accounts for only 13% of the utility’s generating capacity, which is great given Obama’s focus these days. And the company plans to spend $880 million between 2009 and 2013 on its solar power program. At the same time, Edison Mission Group will work with First Solar on upcoming solar projects. Edison International might be the kind of utility, Cramer said, that Obama holds up as an example. The government might even be willing to subsidize the business.
EIX beat its fourth-quarter earnings estimates Monday, and the dividend yield is a healthy 4.9%. That payout’s safe because there are more than enough earnings and cash flows to back it up. Still, the stock took a hit today with the rest of the market, and Cramer thinks there could be an analyst downgrade on Tuesday. But that will just give investors a great entry point. EIX is actually trading at a discount to its peers, and according to the company’s net asset value estimations this $25 stock should fetch as high as $56. Even on the low end of analysts’ estimates EIX should be worth about $43 a share.
So how do you play it? The company is waiting to issue 2009 guidance until after the California Public Utility Commission meets on March 12 to vote on a rate increase. That increase would boost SoCal Edison’s compound annual growth rate to 16% from 2009 to 2012. The problem, though, is that this vote has already been deferred twice. But Cramer thinks it’s a good idea to be in ahead of that vote regardless. Even if the Commission defers again, investors can still buy more and slowly build a position. In this environment, that’s the best way to buy stocks – in increments as the share price declines and the yield gets bigger.
Questions for Cramer? email@example.com
Questions, comments, suggestions for the Mad Money website? firstname.lastname@example.org