With Southern California home to an abundance of fast-growing public companies that can produce rapid stock appreciation, it might seem a little odd to consider an electric utility’s stock for its price potential. Utilities typically are known for their high dividends, not gains in their stock price.
But with San Diego Gas & Electric Co.'s board of directors agreeing to sell the company to SCEcorp, stock in the San Diego utility is an excellent prospect for investors willing to bet the merger will be approved, according to Edward J. Tirello Jr., utilities analyst and senior vice president at Shearson Lehman Hutton, a brokerage firm in New York.
Tirello was in Orange County last week to address about 250 Shearson Lehman Hutton clients interested in the stocks of SDG&E; and Rosemead-based SCEcorp, which is the holding company for Southern California Edison. Edison serves residents in Central and Southern California, including most of Orange County, and SDG&E; provides electricity in San Diego and a small part of Orange County.
The merger, which would create the nation’s largest investor-owned electric company, calls for each SDG&E; common share to be exchanged for 1.3 newly issued SCEcorp shares, making the takeover worth about $2.4 billion.
The merger requires the approval of shareholders of both companies, as well as regulatory approvals of the state Public Utilities Commission, federal Energy Regulatory Commission, and other regulatory agencies. The companies say the approval process is expected to continue into early next year.
Stock in SDG&E; was boosted when the board accepted the offer in November. During the first months of the long wait, the stock has lost some of the gain as investors express concern that the takeover might not be completed.
SDG&E; stock closed Thursday at $37 per share, unchanged for the week on the New York Stock Exchange. During the past 12 months, the stock has traded as high as $39.50 and as low as $30.625.
“If you believe in the merger, buying (SDG&E; shares) will be an excellent chance to profit,” Tirello said. He said the stock could be worth as much as $43 at the time of a merger.
Tirello said he believes the merger will go through despite strong objections from politicians, San Diego businesses and the city of San Diego, which fears it will lose a hometown utility and the attendant jobs.
“When you look at the merger, don’t lose sight that the companies are owned by the shareholders. The rate payers or the politicians might think it is theirs, but it isn’t,” Tirello said. “The company is regulated by the Public Utilities Commission, not by politicians.”
SDG&E; stock won’t be such a good investment if the merger is blocked, Tirello said.
He said the company’s potential is limited because it buys most of its power from other sources, rather than producing power itself.
And Tirello said the company’s dividend growth record is unimpressive. SDG&E;'s dividend yields an interest rate of 7.3% annually at the stock’s current price.
If the merger is not completed, he predicted the company’s stock price will drop to about $32. Because Tirello makes his recommendations of utility stocks to conservative investors looking for a low-risk source of steady income, rather than those looking for a takeover candidate, he rates the stock a “hold” rather than a “buy” or “sell.”
But SCEcorp’s stock rates a definite “buy” with or without a SDG&E; merger, Tirello said. SCEcorp stock closed Thursday at $31.875, up 12.5 cents for the week on the New York Stock Exchange. The stock has traded between $30 and $34.50 in the past 12 months.
Tirello, who predicted SCEcorp’s takeover of SDG&E; in 1986, described SCEcorp as an aggressively managed company, “which is evident in their semi-hostile merger offer to SDG&E.; That’s great to see for a utility.”
He is particularly impressed by the trend-setting Mission Group, the company’s non-utility operations, which have businesses that include real estate development and financial investment.
SCEcorp also has above average dividend growth, Tirello said. The company’s dividend yields an interest rate of 7.8% annually.
Tirello said he expects SCEcorp to acquire other utilities, and that the next likely acquisition will be Nevada Power. He said SCEcorp has transmission lines and a substation in that utility’s area.