In this article, let's take a look at Scana Corp. (SCG), a $7.88 billion market cap company, which is a South Carolina corporation that is engaged in the generation, transmission, distribution and sale of electricity to retail and wholesale customers, as well as the purchase, sale and transportation of natural gas to retail customers.
Hedge Fund Activity
Hedge fund guru Joel Greenblatt (Trades, Portfolio) bought the stock in the fourth quarter of 2014. Greenblatt initiated a position with 32,180 shares, valued at $1.94 million. On the other hand, Jim Simons (Trades, Portfolio) have reduced the stake by 34% on the quarter, holding 194,100 shares, valued at $11.72 million. Let�s see some probable reasons why Greenblatt is long in this stock.
Nuclear Investment
Having a good relationship with regulators continues to be crucial, as the firm invests $5.5 billion in a new nuclear plant. Legislation was favorable for large capital projects and this is very important for the business model. The billionaire nuclear investment should double the company's size in the future.
Attractive Yield
The company has good cash that allows it to reward current investors through dividends. Last year, the company announced an increase in the quarterly dividend to $0.525 a share from $0.523. The past month, the company has announced another hike that was paid on April 1. Then new dividend is at $0.545 per share, representing $2.18 in a year basis. Dividend-payment history affirms its commitment to maximize shareholder wealth. The annualized yield is 3.9% which we consider is very attractive for income investors.
Revenues, Margins and Profitability
Looking at profitability, revenues increased by 8.7% but earnings per share remained flat in the fourth quarter compared to the same quarter a year ago ($0.73), meeting the Thomson Reuters consensus estimate. The net income increased by 1.9% when compared to the same quarter one year prior, to $105 million from $103 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.
Ticker | Company | ROE (%) |
SCG | Scana | 11.09 |
WEC | Wisconsin Energy Corp. | 13.47 |
AEE | Ameren Corp. | 8.85 |
CMS | CMS Energy | 13.21 |
LNT | Alliant Energy Corp. | 11.69 |
| Industry Median | 8.87 |
The company has a current ROE of 11.09% which is higher than the industry median. Also, it is higher than the one exhibit by Ameren (AEE). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Wisconsin Energy (WEC) and CMS Energy (CMS) could be appropriate options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Year | ROE (%) |
Dec 05 | 11.95 |
Dec 06 | 10.98 |
Dec 07 | 10.80 |
Dec 08 | 11.33 |
Dec 09 | 10.87 |
Dec 10 | 10.58 |
Dec 11 | 10.20 |
Dec 12 | 10.44 |
Dec 13 | 10.68 |
Dec 14 | 11.15 |
We must mention that current ROE exceeded the one from the same quarter one year prior, and this is a sign of strength.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 14.4x, trading at a discount compared to an average of 21.80x for the industry. To use another metric, its price-to-book ratio of 1.60x indicates a discount versus the industry average of 1.66x while the price-to-sales ratio of 1.58x is below the industry average of 1.69x. All these metrics indicate that the stock is relatively undervalued and subject to a potential buy.
$10K Invested 5 Years Ago
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 $18,058, which represents a 12.6% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, we believe the firm will continue to generate earnings and cash flow to compensate shareholders and we expect more dividend increases in the upcoming future. Moreover, all the measures we have seen in the relative valuation section and the return on equity that exceeds the industry average make me feel bullish on this stock.
Disclosure: Omar Venerio holds no position in any stocks mentioned
This article first appeared on
GuruFocus.