Cutting the dividend to fund growth has become more common among integrated energy companies and utilities in recent months, but changing circumstances and new tax laws could reverse that policy, according to a report issued Thursday by CreditSights analysts.

“When safety gets boring again and the market gets flat, total return could be the new mantra,” said analysts Dot Matthews and Andy DeVries. “Lots of utilities have room to raise the dividend,” they said, and equity buyers would be drawn to dividends, even if the company only grows 1-2% a year and has only occasional rate increases.

FPL Group led several companies in a dividend-cutting effort in 1994 to prepare for competition, and since then, many have kept their payments static or only slightly raised them to provide cash for expansion, the analysts noted. Now, however, several of the energy companies could return to dividends “without, in our opinion, harming their credit ratings.”

Using all of their earnings and debt criteria, the analysts focused on five names that “could raise their dividends and we think might just do so.” Their short list is Constellation Energy Group, Entergy, Exelon, Pinnacle West and Sempra, but while these were the “most compelling names…there are others that could follow a movement to raise dividends,” including FPL and Dominion.

Matthews and DeVries said they “would rather see utilities raise the dividend payout than buy something in Brazil. The payout can always be cut in hard times, but the plant in Brazil could be forever.”

They also wrote, “Most utilities that can have been running for the cover of their regulated operations, telling analysts’ meetings that they are your daddy’s utility company once again. The more cash flow from regulated businesses the better, especially with everyone still reeling from all those mark-to-model earnings, off-balance sheet transactions and shenanigans historically not associated with utilities.”

However, equity investors could desert the utility sector in a flat-to-down market, which would make it difficult to raise future funds. Still, the “better-rated companies” that may not need cash to pay down debt could instead raise the dividend. “Now that the dividend is on a par, tax-wise, with capital gains, we see it as a more appealing alternative for those not inclined to want to buy a lot of things.”

Among those companies still paying a “meaningful” dividend, CreditSights found that the average yield is about 4.5%, which would be taxed at 15%. The average payout ratio is 58.6%, and the average dividend/earnings before interest and taxes is 19.7%.

To learn more about CreditSights, visit the web site at www.creditsights.com.

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