FirstEnergy Corp.: A Utility With Huge Upside Potential
The GDP for the Q1 was recently revised downward by 25%, from 2.4% to 1.8%.
Yet immediately following the announcement stocks went up…
In the black-is-white, good-is-bad world where the Fed manipulates interest rates, we’ve almost gotten used to such reactions.
But upon further analysis, that adjustment could be a big disappointment for the stock market in the long run.
Consider: If the economy grew 25% slower than previously reported, what does that say about the “recovery”?
Yet, to add just a bit more confusion, at the same time the consumer outlook for the economy is higher than it’s been in years. True, consumers have been wrong before.
But when consumers are confident, they spend. When they spend, the economy benefits. It can be a self-fulfilling prophecy.
Regardless, if the economy is growing slower than reported previously, we’d expect investors to start looking more closely again at those companies that provide products and services that consumers have to buy – need to buy – and, as always, that includes utilities.
Particularly, in times of economic uncertainty, when a utility has a high-yielding dividend that’s been paid regularly for years, investors eventually come swarming.
And FirstEnergy Corp. (FE) fits that bill to a “T.”
Steady As She Goes
Like I said, most utility companies are looked to for income and security – generally speaking, people need the services utilities provide regardless of the state of the economy.
That doesn’t mean the share value of utilities doesn’t fluctuate, of course. But what it does mean is that there’s a lower risk of heavy swings in price. (That doesn’t always hold true, however.)
Now, FirstEnergy is one of the largest investor-owned utilities in the United States. This means that it owns, directly or indirectly, all of the outstanding shares of eight electric utilities.
The facilities it operates generate power from nuclear, wind, coal, hydro and gas throughout the East Coast, as well as in Ohio and Pennsylvania.
But as a dividend payer, FirstEnergy is a mixed bag.
Although it’s kept its payout consecutive for almost two decades, increases have been thin, with payouts remaining flat since 2008 at $0.55 per share.
(Limited) Opportunity Knocks
While shareholders have been enjoying FE’s consistent dividend since 2008, the stock price hasn’t been so stable.
In fact, it tanked.
Back in ‘08 the stock was trading for more than $80 per share… and now it’s just above $37 – a level not seen since the worst of the financial crisis and back in 2004.
You see, First Energy isn’t facing challenges that are unique to it. The whole utility sector is currently taking a beating. Investors are rotating into cyclical stocks.
But that’s not going to last forever. And soon enough – especially if market volatility starts becoming a greater worry – utilities are going to see another run-up.
Bottom line: Moving forward, there’s plenty of upside to the stock. However, the dividend is lacking. If income growth is a primary concern, it could be worth waiting for an increase declaration before jumping on board.