Hi Grommit -
Re: Empire District Electric Co. (EDE)
One of my larger dividend plays, I hedged 1/2 of my position today selling the Dec $20 calls for $0.65/share. I also should receive two dividend payments of $0.32/share per quarter (September 3rd Qtr & December 4th Qtr). The 2010 analysts estimates would give a 15.6 PE at $20.00/share and for 2011 the PE would be 13.8. This is getting a bit high for my comfort zone especially since Yahoo has the EDE dividend payout ratio at 106% (this is based on lagging earnings).
The company did get approval for a July 2010 rate increase for their Kansas electric customers but I believe it was only 60% of what they had asked. There are pending rate approvals in process to accelerate the recovery of capital improvement projects which will help further support the current divided. However, I do not see the company increasing their dividend any time soon.
Therefore, by writing the December $20 calls, I can increase my overall return by 6% and if the stock gets called away, it becomes a source of funds for reinvestment.
With a 7% dividend yield, a 6% call premium generated from writing the covered calls and a 11% potential capital gain based on my avg cost (if the stock is called away at $20.00/share), I can lock in a 22% return on one half of my EDE position by December 17, 2010. I may even be able to write the calls again after December 17, 2010 to further enhance my overall return.
In the current environment, I prefer to stay in good paying utility companies (both regulated & unregulated) with PE's at 11 or lower with overall debt levels supported by current cash flows and/or non strategic assets that could be sold to reduce debt if required (eg. NG reserves owned by unregulated division of a utility, wholly owned NG pipeline subsidiary similar to what EDE owns & operates etc.).
I think it pays to be on the defense in this environment. It's still not absolutely clear to me that a double dip can be avoided.
EKS |
