Summary: Most of the companies that have been turning up on my cheap stock screens lately deserve to be cheap because of their poor financial strength. Wisconsin Energy (WEC) fits the profile. Although it is true that their cash flow is good, and the interest coverage ratio is a solid 3.69, the current ratio and the debt to equity ratio are unsatisfactory, especially for a company with a history of cutting dividend payments. The current dividend yield of 2.15% is inadequate to compensate investors for the risk of owning a security with this kind of history.
Description of business from the company’s website: Wisconsin Energy’s principal business is providing electric and natural gas service to customers across Wisconsin and the Upper Peninsula of Michigan. Total assets are more than $10 billion. Utility Businesses: We Energies and Edison Sault Electric Company serve more than one million electric customers in Wisconsin and Michigan’s Upper Peninsula and one million natural gas customers in Wisconsin. We Energies is the trade name of Wisconsin Electric Power Company and Wisconsin Gas Company, the company’s utility subsidiaries. Non-Utility Businesses: Non-utility businesses include renewable energy and real estate development.
Is the size of firm over 1 billion market capitalization? Yes, 5.4B.
Price to earnings analysis: is the current P/E ratio below 20? Yes, 16.5.
Has the stock’s performance equaled or exceeded the performance of the S&P? Yes. WEC underperformed from 1997 to 2003, but it has caught up again.
Volatility: Is the stock’s beta less than or equal to 1.00? Yes, .71.
Price to assets analysis: is the P/B ratio below 2.5? Yes, 1.9
Price to cash flow analysis: is the current P/CF ratio below 20? Yes, 8.1.
Does the stock’s dividend yield exceed the yield of the S&P 500? Just barely: 2.15 vs. 2.10.
Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? No: -8.47 vs. 1.69. WEC had a history of steadily rising dividend payments until 2000, when financial difficulties resulted in a reduction of the dividend from .39 to .20. Since then the dividend has risen steadily to the present .25.
Dividend payout analysis: Is the payout ratio less than 50%? Yes, 32.66.
Current ratio analysis: Is the current ratio greater than 2.0? No: .63.
Debt to equity ratio analysis: Is the total debt to equity ratio less than 1.0? No: 1.38.
Interest coverage analysis: Does the interest coverage ratio exceed 3.0? Yes: 3.69.
Intrinsic valuation – is the stock selling below its forward intrinsic value? No, unless you assume the earnings growth rate will exceed a constant 7%, and that seems unreasonable for a regulated public utility in an area with moderate population growth and economic expansion.
Earnings stability – has there been positive net income for each of the prior ten years? Yes.
Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes.
Is the business simple and understandable? Yes.
Does the business have favorable long term prospects? Yes.
Are company insiders buying more stock than they are selling? No.
Does technical analysis reveal a convincing uptrend? Yes.