Like most Americans, I send $60 to $100 to my local power company; in my case Xcel Energy (NYSE: XEL) every month. This got me thinking, is Xcel a value investment? Can I get some of that cash back from my friendly neighborhood utility, through dividends or share value increases?
After all, electric and gas utilities are one of Warren Buffett’s favorite investments. Berkshire Hathaway Energy (NYSE: BRK.B) owns a batch of them; including NV Energy and Northern Gas. NV Energy is a regional electric company in Nevada similar to Xcel.
Xcel is a utility holding company based in Minneapolis that controls utilities in Colorado, Michigan, Minnesota, New Mexico, Texaco, South Dakota, North Dakota, and Wisconsin. It currently supplies electricity and natural gas to one of the nation’s fastest growing cities; Denver, and many other communities.
Is Xcel Energy Making Money?
The case for utilities like Xcel is pretty simple they have a captive market of customers that have no choice but to pay their bills if they want light, heat, hot water, and electricity for their video games and TV sets.
Xcel claims to have around 3.56 million electric customers and around two million buyers of its natural gas. According to Buffett wisdom, those numbers should generate a lot of float or cash in the form of monthly payments. Yet, Xcel’s financial numbers indicate that may not be the case.
Xcel reported a net income of just $492.14 million, revenues of $3.017 billion, and an operating income of $818.36 million on 30 September 2017, data from Stockrow indicates. It also reported an operating cash flow of $1.075 billion and an anemic free cash flow of $292.70 billion. That gave Xcel just $242.37 million in cash and short-term investments and $167.84 million in cash on 30 September 2017.
The income and cash figures are pathetic when one realizes that Xcel reported $42.468 billion in total assets at the end of 3rd Quarter 2017. Those assets produced revenues of just $3.0169 billion in 3rd Quarter 2017.
Xcel’s Inefficient Business Model
These figures show us that Xcel’s business is not making much money and its’ business model is not very efficient. The captive market is not an automatic guarantee of cash in the utility business.
Such data indicate that Xcel would not be able to compete if more efficient competitors figured out how to sell its’ product energy directly to its customers. That development is not as farfetched as you might think; Tesla Energy (NASDAQ: TSLA) is already selling its lithium-ion batteries and solar-electric panels including the solar roof to the public.
Mass consumer sales of such products are probably a few years away, but the technology to achieve that exists now. More disruptive solutions such as battery power packs sold through retailers like Walmart (NYSE: WMT), natural gas-powered fuel cells, and hydrogen fuel cells might be on the horizon.
The day when the average household or business might be able to produce all or most of its power is on the horizon. Much of the technology needed to achieve household energy self-sufficiency exists right now.
Are Utilities like Xcel Doomed?
Some observers; including myself, have compared the situation in utilities to that in news and advertising.
Just 20 years ago news and local information delivery in the United States was dominated by large, centralized, and highly-inefficient monopolies that utilized expensive, archaic technologies. Such entities included newspapers and telephone book publishers. They made money because anybody who wanted to advertise locally had to pay their rates.
The system was inefficient but lucrative for operators, including Buffett. Then next-generation players moved in with new, more nimble technologies, and decimated the business. The most profitable of the newcomers was Google (now Alphabet (NASDAQ: GOOG); which stole newspaper and phonebook’s advertising monopoly, and became incredibly profitable in the process.
Today’s utilities display more than a casual similarity to the old-time newspaper operators and phonebook companies. That is ignoring the competition, offering questionable customer service, and treating ratepayers like cattle. That alone should give long-term investors a pause, but value investors might note companies like Xcel should make money for investors for years – even if progress ultimately kills their business.
Xcel Sort of Pays out for Investors
Xcel sort of pays off for stockholders right now, it has been generating a quarterly dividend of 36¢ since March 2017. That dividend has been growing by around 2¢ a year for some time. It rose from 32¢ to 34¢ in 2015 and 34¢ to 36¢ in 2017.
The dividend is alright for a $44.56 a share (Xcel’s price on 2 February 2018) stock. Yet I wonder who long it can continue, Xcel’s revenues fell by .76% during 3rd quarter 2017.
My advice is to be leery of stocks like Xcel; because they are no longer the dependable moneymakers earlier generations of value investors enjoyed. Expect to see some major carnage in the utility sector if the progress in fields like batteries continues.