We all know that electric utilities are supposed to be one of the ultimate value investments. They are theoretically safe, stable, and unsexy moneymakers that a lot of investors ignore.
Value gurus like Warren Buffett like power companies because they have a captive market, no real competition on the local level, and sell services that everybody but the Amish need. More importantly, most of us cannot live without electricity, and we are getting more dependent upon it all the time.
That brings us to somewhat obscure regional electric utilities such as the Black Hills Corporation (NYSE: BKH). For those of you who are unfamiliar with it, Black Hills operates electric and natural gas utilities in the Rocky Mountain West, the Great Plains, and Arkansas. It keeps the lights on in places like Canon City, Colorado, and sells natural gas in Nebraska and Wyoming under the name Black Hills Energy
Are Utilities still a Value Investment
That is a very unsexy business, and theoretically a safe one because it has 1.2 million customers that must pay their bills every month if they want electricity, heat, and hot water. This theoretically generates a lot of float which is why Uncle Warren loves utilities.
Other arguments for utilities are that they are a very safe business. Even if we switch to solar or wind-power most people will still get their electricity from the grid operated by companies like Black Hills. The same goes for giant battery farms like those Tesla Energy (NASDAQ: TSLA) is building around the world, the grid will still be needed to take that power most people’s homes.
Such battery farms can become an additional source of revenues. A Tesla and Neoen battery farm in Australia made $800,000 in a few days, and generates up to $11,353.02 a kilowatt hour, Electrek reported. Building and operating such battery farms might become a major profit center for Black Hills in the near future.
Such battery farms will be needed because the demand for electricity is growing by leaps and bounds. New electricity hog devices like electric-cars, computers, cryptocurrency mining rigs, 3D printers, and robots of all shapes and sizes are going on sale each day.
Technology’s appetite for electricity seems to know no bounds, charging the Tesla electric semi would require as much juice as a town of 12,000 people, The Financial Times reported. Tesla has already taken orders for dozens of semis and announced plans to double the size of its charging network for electric cars. Volkswagen is building its own network of charging stations and plans to roll out 50 electric models by 2025.
Is Black Hills Corporation Making Money
The opportunity for making money in utilities is still vast and growing but is Black Hills making money?
Disturbingly, Black Hills is not making that much money. It reported revenues of just $342.14 million, a gross profit of $128.12 million, an operating income of $79.52 million and a net income of $27.66 million on 30 September 2017. The performance is absolutely anemic and the cash is not much better.
Black Hills had an operating cash flow of just $56.66 million and cash and short-term investments of only $16.86 million on September 30, 2017. That is tiny, and it raises the question of whether small utilities like Black Hills Energy can survive on their own?
This question needs to be asked because it is likely that companies like Black Hills will be forced to make heavy investments in expensive new technology like battery farms, and renewable power sources over the next few years. The Trump administration has reversed President Obama’s clean-energy requirements but how long will that last.
How Long can Utilities Survive?
Judging by 2018 political realities there will be a liberal Democrat dedicated to radical reductions in the use of fossil fuels in the White House in 2021.
PredictIt named U.S. Senator Bernie Sanders (I-Vermont); known for his “To hell with the fossil fuel industry” rhetoric, as the leading contender for the 2020 Democratic presidential nomination in January 2018.Throw in a left-leaning Democratic Congress, and that means death to fossil fuels in the USA as a national policy.
If companies like Black Hills are smart they’ll ignore the Trump administration and use the windfall they get from the recent GOP tax bill to invest in batteries and renewable energy. That would position them for survival in the post-Trump world.
Utilities unable to do that should consider selling out to larger organizations such as Berkshire Hathaway (NYSE: BRK.H). They might have no choice in a few years.
Is Black Hills a Good Investment?
Black Hills Corporation was a pretty poor investment at the $55.76 it was trading at on 28 January 2018. It is definitely priced, and nothing, not even the 47.5¢ dividend paid on November 16, 2017, justifies that.
The dividend is troubling in itself because the company simply cannot afford it. The money would be better spent on expansion or better technology. Instead, it looks as if the company is trying to buy shareholders off with a high dividend.
Stay away from Black Hills Corporations folks, there are better dividend stocks with a real chance of growth out there. With a revenue growth rate of just 2.5% in 3rd Quarter 2017 Black Hills is going nowhere but down.