$XEL
XEL operates through regulated electric utility and regulated natural gas utility segments. This is the type of company I will always avoid. Reason?
1) ROE is capped at 9-10% by regulators. State and federal regulators grant Xcel exclusive rights to charge customers rates that allow it to earn a “fair” return on capital it invests to build, operate, and maintain its infrastructure. In exchange for Xcel’s service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs.
2) EPS on paper looks ok and growing, but FCF? Non-existent. All operating cash flow is used to reinvest.
3) They are raising capital to pay out dividends and cover the negative FCF. Net raising of capital in the previous 10Y was $ 20bln; Cash Paid for Dividends - $ 8.5bln; Free cash flow – minus $ 11 bln.
4) XEL clearly has not created any value for shareholders in the last 10 years. ROIC remains lower than WACC, clearly indicating that Xcel Energy is not meeting its cost of capital and is therefore, by this measure, destroying economic value.
At the same time, the 10-year median revenue growth is just 1%, and even negative in 2023 and 2024. Non-existent growth is not a bad thing for companies with no economic value added. Companies with ROIC < WACC should concentrate on raising ROIC, not growth. But for Xcel it is “mission impossible” due to fixed customer rates. Shareholders don’t appreciate these kinds of limitations: 10Y, 5Y, 3Y stock returns underperformed S&P500 significantly.
Max historical drawdown was 80% in 2002. During financial crisis stock plummeted 40%, refuting the claim that, as a utility company, it can be a decent hedge during recessions.
Shares overvalued.