An Attractive Dividend Stock in the Utility Sector

In this article, let's take a look at Scana Corp. (SCG, Financial), a $7.72 billion market cap South Carolina corporation that is engaged in the generation, transmission, distribution and sale of electricity to retail and wholesale customers and the purchase, sale and transportation of natural gas to retail customers.

Hedge fund activity

Jim Simons (Trades, Portfolio) is the largest shareholder of the stock with a stake containing 577,200 shares valued at $29.2 billion. The guru has increased his position by 276% in the second quarter. Meanwhile the stock has plummeted 9% in that period.

Hedge fund guru David Dreman (Trades, Portfolio) bought 4,657 shares of the stock in the second quarter. On the other hand, Mario Gabelli (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have reduced the stock by 13.89% and 31.32%, respectively.

Doubling size

The company has a diversified portfolio of power generation capabilities with assets in coal, natural gas, nuclear and renewables. In the past, regulators have granted the highest allowed returns, and this was crucial to reach 6% annual earnings growth in the period 2010-14. The company deploys capital to the nuclear investment, about $1.5 billion annually until 2017. It expects to double the size in the future.

Income Investors

Scana´s Board of Directors declared a regular quarterly dividend of $0.545 per share for the quarter ending Sept. 30. The dividend is payable Oct. 1 to shareholders of record at the close of business on Sept. 10. This was not the first time dividends have increased from $0.523 to $0.525 and then to $0.545 per share. History affirms its commitment to maximize shareholder wealth. On an annual basis, dividends of $2.18 yield 4.1% which is very attractive for income investors.

Revenues, margins and profitability

Looking at profitability, revenues increased by 6% but earnings per share slightly incrased in the second quarter compared to the same quarter a year ago ($0.69 vs $0.68), beating estimates by $0.02. The net income increased by 3.1% when compared to the same quarter a year ago, to $99 million from $96 million.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 7.42% which is lower than the industry median and its peers: Ameren (AEE, Financial), Wisconsin Energy (WEC, Financial), CMS Energy (CMS, Financial) and Alliant Energy (LNT, Financial). It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 10.32x, trading at a discount compared to an average of 17.20x for the industry. To use another metric, its price-to-book ratio of 1.45x indicates a discount versus the industry average of 1.53x while the price-to-sales ratio of 1.64x is above the industry average of 1.35x. The first two metrics indicate that the stock is relatively undervalued and subject to a potential buy.

The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,422, which represents a 13% compound annual growth rate.

Final comment

As outlined in the article, by generating earnings and cash flow the company can compensate shareholders and have more dividend increases. Moreover, legislation was favorable and this is a key aspect for the business model.

Some of the measures we have seen in the relative valuation section make me feel bullish on this stock.

Disclosure: Omar Venerio holds no position in any stocks mentioned.