Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future to retire from their full-time job at 60.

JM Smucker's (SJM) Review - 04 Oct 2014 18:30

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When one thinks of JM Smucker’s (SJM) the first thing that comes to mind is peanut butter & jelly. And why not, JIF is the number one selling peanut butter brand and their jellies are also near the top.

But SJM is much more diverse than that. Some of their other major products include Pillsbury, Crisco, Hungry Jack, Folgers coffee, and Keurig coffee lines Dunkin Donuts and Millstone. Interestingly it is SJM’s coffee lines that have provided much of their earnings growth of the last few years.

Operating in the consumer goods segment it is easy to assume that SJM is a dividend growth company and your assumption would be correct. SJM has annually increased dividends for the last 12 years. So the next questions are; is the current dividend stable and are growth rates sustainable.

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Dividend Growth Rates (per share)
1-Yr 3-Yr 5-Yr 10-Yr
11.5% 12.4% 11.8% 9.5%

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Looking at some of my quick screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria SJM Criteria SJM
>= 7.2% 11.5% < 1 0.46
Dividend Yield Payout Ratio
Criteria SJM Criteria SJM
> 3% 2.6% < 70% 47.6%

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The only weakness on the initial screen is that the current dividend rate of 2.6% is below the 3% criteria.

Looking at earnings over the last 5 years we have positive earnings growth since 2011.

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Earnings Per Share
2014 2013 2012 2011 2010
EPS $5.42 $5.00 $4.06 $4.05 $4.15
EPS YoY Growth 8.4% 23.15% 0.2% -2.4%

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Looking at different price to earnings ratios and again we see positive signs that the stock is adequately priced and even lower than the industry average.

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Price to Earnings Ratios
P/E (trailing 12 months) 18.37
P/E (forward 12 months) 15.39
P/E 5 year average 18.34
P/E industry average 20.06

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On the surface, SJM’s numbers per share indicate a strong dividend grower. Yet, per share data can be somewhat misleading when factoring in share buybacks or additional share distributions. SJM’s share buyback program has reduced outstanding shares from 118,951,434 in 2010 to 104,332,241 in 2014 (a reduction of 12.3%). With slightly more than 12% of outstanding shares removed from the market it is not hard to see how this clouds our ability to see the true financial health of the company. To look past share buybacks it pays dividends (pun intended) to analyze financial statements.

First up is earnings and revenue:

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2014 2013 2012 2011 2010
Earnings $565.2M $544.2M $459.7M $479.5M $494.1M
Earnings YoY Growth 3.85% 18.38% -4.12% -2.95%
Revenue $5,610.6M $5,897.7M $5,525.8M $4,825.7M $4,605.3M
Revenue YoY Growth -4.86% 6.73% 14.5% 4.78%

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Unlike the per share numbers the financial statements are showing growth trends that aren’t that attractive. In the prepackaged food industry it is not uncommon to experience temporary periods of declining revenue growth, you see similar declines in companies like Kellogs (K), ConAgra (CAG), or General Mills (GIS). But, what all these companies have in common is their ability to invest in new products, advertising and/or acquiring other businesses to increase revenue and earnings.

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Looking at SJM investments; they are introducing 125 new products in the upcoming 2015 fiscal year and made a significant acquisition of Enray, Inc and Silocaf of New Orleans, Inc. These acquisitions will increases their product offerings in grain & coffee segments. In SJM’s latest 10Q filing they entered into a definitive agreement to acquire Sahale Snacks, Inc., a leading manufacturer and marketer of premium, branded nut and fruit snacks, for approximately $80M. So we see evidence that SJM is investing in new products and acquisitions as their primary strategy to grow earnings and revenue over the long term. What I expect from SJM in the future (2016 and beyond) is a scale down of new products and focus on improving operating costs to further increase earnings and margins down the road.

Of course buying back shares, developing new product lines or acquiring other business units is never free and is typically funded via long term debt agreements. Looking at SJM’s long term debt levels they have increased from $2.07B in 2013 to $2.28B in 2014 (an increase of 10.5%). While this may seem alarming it does make sense to aggressively borrow now while rates are low. Additionally, even with the rise in long term debt their debt to equity still stands at a respectable .46 (any number below 1 is strong) and current ratio is 1.6 (anything above 1 is a good signal).

SJM’s future growth is not guaranteed and comes with risks. SJM’s product lines are dependent on agricultural supply. A dry year or drought, like what was experienced over the summer of 2014, can drive commodity prices drastically upwards and considering much of their product depends on fruit and coffee beans it is not hard to understand how a bad growing season will impact earnings.

Another area of risk is a strengthening dollar. In the latest 10Q filing, SJM ‘s earnings on international sales were $35.4M versus sales of $298.3M in comparison to last year’s performance of $43.1M earnings and revenue of $300.1M. What we see is that in 2013 14.36% of sales went to earnings while in 2014 it dropped to 11.86%. Most of the decline was due to exchange rates and a strong dollar. With the U.S. Federal government scaling back their bond purchasing program over the next year it could very well be a catalyst for the dollar being even stronger in 2015 further hurting their earnings growth.

One final area of the financial statements to look at where share buybacks cloud your view is the actual dividends paid or as I like to call it The Real Dividend Growth Rate.

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2014 2013 2012 2011 2010
Annual Dividends Paid $238M $222.8M $213.7M $194M $166.2M
Dividends YoY Growth 6.8% 4.25% 10.15% 16.72%

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Actual dividends paid growth rate is significantly lower than the per share growth rate. Buybacks appear to contribute from 21% to 43% of dividend per share growth. Without significant earnings/revenue growth the current dividend is reliant on a combination of share buybacks and increasing the percentage of earnings paid in dividends (currently 47.6%).

In summary, the company has a strong balance sheet, well managed debt and a deep pipeline of new products to help increase future revenues. Yet for all of its strengths, rising agricultural commodity prices and a strong dollar will continue to hurt overall earnings growth. With a 47.6% dividend payout and continued share buyback program there is still some room to grow the dividend per share in the near term and I see an annual growth rate low of 5% and high of 8% that can be achieved without significantly growing the payout ratio above 60% over the next three years. Additionally I see no signs that he dividend will be suspended, cut or completely canceled in that time either. Based on retaining the existing dividend payout and reduced potential growth I would be interested buying if the stock price drops to below $98 a share to align with my long term DGI goals.

Note: I do not own this stock at time of this writing. - Comments: 0

3rd Quarter Portfolio Growth Update - 27 Sep 2014 14:34

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Quarterly Dividend Growth
% from Div Growth 0.12%
% from New Investments 3.28%
% from Reinvested Div 0%
% from Special Dividends -3.35%
% Overall Growth 0.06%
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Triangle Capital's (TCAP) special dividend expired in the second quarter and hit my dividend growth with a negative decline in the third. Luckily I had a new purchase in Maiden Holdings (MHLD) that essentially zeroed out the loss.

For the quarter, one stock contributed nicely to my passive growth; Bar Harbor Bank (BHB) raised their quarterly dividend by 3.2%.

This was the first quarter where there was no increase from reinvested dividends. This isn't a surprise for me as the 2nd & 3rd quarters of a new year I'm busy buying new shares with new money while I let the dividend pile up. With the 4th quarter coming up I expect to again see no growth from reinvested dividend but I do plan on investing all of my dividend that have been piling up which will probably contribute to 2015 growth.

Microsoft (MSFT) continues to be faithful with annual dividend increases. In September, MSFT announced an 11% increase in dividends starting in Nov. 2014.

Looking forward to the next quarter I'm expecting dividend increases from BP (BP), Seagate (STX) and Ensco Plc (ESV). If Bar Harbor Bank (BHB) keeps up its trend of quarterly dividend increases (currently at 13 consecutive quarters) I may have an additional bump. These increases will probably not contribute to 4th quarter growth but will be a nice start to 1st quarter of next year. - Comments: 0

New Stock Position - 27 Jul 2014 01:10

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With the recent pullback in GE's stock price I initiated a small position on Friday 7/25 at a share price of 25.76 which will provide $50 annually to my dividend portfolio.

While I needed an industrial to diversify my portfolio I was not entirely sold on GE's future. Many DG investors over the last two years have been buying shares on the faith of GE's return to its historically legendary performance. But I wasn't convinced that GE was completely out of the woods in regards to risk. I could have initiated a larger position but until certain numbers improve I'll keep a small position.

Starting with the bad numbers. Their debt to equity ratio came in at a whopping 2.38 while most of their competitors have a debt/equity ratio of 1 or less. But in fairness GE has been slowly reducing their debt load over the last 3 years. Another concern is their payout ratio sitting at roughly 60% and again in comparison to their peers who have a ratio below 50% seems to be a bit steep and when vital money may be needed for investment.

Now the good. Revenues are forecasted to grow at an annual rate of 7% over the next 5 years and when combined with a stock repurchase program it makes a dividend growth rate of 7-8% annually very achievable. Reducing exposure to the financial sector is another positive. GE has been slowly divesting GE Capital's assets to reduce over exposure to one industry (it was their down fall in the crash of 2008-09). Looking to exit the appliance business, GE invested heavily to make its appliance segment more efficient and competitive globally which is making the divestiture a more attractive deal than it was just 5-6 years ago. While some might see this as a negative it really isn't, the appliance business while doing well with sales carries very slim margins. As an investor I'd rather see money invested with products or services that have higher profit margins.

Finally the risk. Going forward GE will be acquiring Alstom's power generating business at a cost of $10 billion. There are many what-if scenarios so the future is still unclear. I plan on giving it 2 years to see how this business has been integrated and contributes to profit margins. - Comments: 0

Quarterly Dividend Update - 13 Jul 2014 15:44

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Quarterly Dividend Growth
% from Div Growth 2.93%
% from New Investments 5.5%
% from Reinvested Div 2.97%
% from Special Dividends 0%
% Overall Growth 11.47%
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Last quarter's new investment in Bar Harbor Bank (BHB) and increasing my position in Ensco (ESV) contributed a 5.5% increase to income. I also initiated a position in Maiden Holdings (MHLD) but it will not start contributing until the 3rd quarter.

For the quarter, there were eight stocks that contributed nicely to my overall passive growth; Air Products (APD), Chevron (CVX), Doctor Pepper-Snapple (DPS), General Mills (GIS), Hasbro (HAS), Peoples Bank (PBCT), Proctor & Gamble (PG, and utlity PPL (PPL). Orgranic passive dividend growth represented a 2.93% increase to income for the quarter.

While the past two quarters were very active with many of my holdings announcing dividend increases, I do not foresee any increase from dividend growth until the 4th quarter so this will be muted until then.

Looking forward to the next quarter I may experience my first decline from quarter to quarter growth. Triangle Capital (TCAP) issued a special dividend that was paid out over the 1st and second quarters. With its end I may not be able to fully compensate even with the additional purchase of Maiden Holdings. - Comments: 0

Update on Goals - 28 Jun 2014 14:53

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Mr. Market has continued to amaze me with its gains. While no significant impact on my Dividend Growth goals, it has helped smash through my 401K & IRA goals and it is only June. The decision I need to make now is to adjust my short term one year goal or lock in some of the gains and increase my cash position. This is not an easy decision so I will take my time and see how the 3rd quarter plays out.

For Dividend Growth goals I hit 87% complete on new contributions and 82% on increasing next years dividend payouts. This is not entirely a shock as most of my free cash comes in the first half of the year, the second half of the year I usually have zero free cash and it looks like I'm on pace of meeting my goal for the year by the end of summer.

On my radar for new purchases I'm really attracted to McDonald's (MCD), Genuine Parts Company (GPC), Proctor & Gamble (PG), an General Mills (GIS). Not sure which of these will be my final purchase for newly invested money but definitely two will be there at quarters end.

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- Comments: 0

Recent Buys - ESV, BHB & MHLD - 30 Apr 2014 00:06

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Finding opportunities for new acquisitions that meet my growth requirements is getting tougher but with a little elbow grease there are still opportunities.
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My first purchase was to increase my position in the oil platform company Ensco (ESV). This was only a small purchase ($500) but could not resist the share price of $48.72 per share and a yield of 6.16%. Not sure why but Mr. Market has punished this stock the last 6 months so I'm capitalizing on the opportunity. This purchase adds $30 annually to my portfolio.
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Second purchase was Bar Harbor Bank (BHB) at $37.42 a share and yield of 3.5%. Bar Harbor is a local Maine bank with 15 branches, a well managed balance sheet and has been around since 1887. They have a dividend growth history of 10 years with a 5% average rate. Adding a twist to this purchase is a recently announced 3 for 2 stock split scheduled in May and an 3% dividend increase slated for a June payout. Another feature that makes this an attractive purchase is that they review dividend payouts quarterly and have had 12 straight quarters of dividend growth. The one down side is the size of the company with a market cap of only $157M. With a small cap it is hard to get the attention of wall street investors so equity growth will be limited but on the positive side it translates into a low beta. This purchase adds $56.70 annually to my portfolio.
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Third purchase was Maiden Holdings Ltd (MHLD) at $12.06 per share and yield of 3.65%. MHLD is an insurance company based in Bermuda that provides reinsurance solutions to regional and specialty insurers primarily in the United States and Europe. It operates in three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share. They have a 6 year dividend growth history and a 3 year 11% average dividend growth rate. This purchase adds $54 annually to my portfolio.
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BHB and MHLD were both on my watch list so I can scratch them off the list. Tough part is I have nothing to replace them with and the candidates on my watch list is getting smaller each quarter. - Comments: 0

My Goals After One Quarter - 06 Apr 2014 12:24

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Mr. Market has continued to be nice with annual dividend increases during the month of March from Air Products (APD) & Waste Management (WM). All dividend increases for the quarter contributed nicely to my forward dividend growth goal allowing me exceed the planned 25% versus 33% for the quarter.

Last month I spoke how my wife found a very flexible part-time job. It is only a couple hours a day and at minimum wage. It was thanks to this new job that we were able to save $300 for the month as unplanned bills (repairs to cars & house) came rolling in and derailed my savings plan.

Unfortunately $300 was not enough to buy any of my targeted investments so I'm ending the quarter slightly below where I should be for "Contributing to New DGI Purchases" at 21% complete versus a target of 25%. Luckily I finished my taxes and have a decent return coming in June which should be put back on track.

One of the areas that has taken away from ability to save for new purchases is my goal to have a cash balance of 10% in my 401K to reduce risk. I decided to accelerate this to get it out of the way and doubled my 401K contribution. The aggressive approach is paying off as I'm at 80% of my goal versus a planned 25%. My hope is to have this completed by June so I can focus on the 3rd & 4th quarter for acquiring new equities to increase my forward dividend.

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- Comments: 0

Quarterly Portfolio Update - 30 Mar 2014 22:52

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Quarterly Dividend Growth
% from Div Growth .84%
% from New Investments 0.00%
% from Reinvested Div 1.3%
% from Special Dividends 3.97%
% Overall Growth 6.12%
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Last quarter's late re-investment in PPL finally started kicking in this quarter contributing a 3.97% increase to income. As far as new purchases I did pick up some shares in the Healthcare REIT HCP Inc. which represents my first REIT component in my portfolio but will not start contributing until the next quarter.

For the quarter, there were two stocks that contributed to passive growth; GlaxoSmithKline (GSK) and Waste Management (WM). A third stock TCAP contributed with a special one-time dividend payable over two quarters, while nice to receive it will mess with my growth metrics in the third quarter of this year when the special dividend is gone and I may have to show a negative decrease in quarterly growth.

WM was disappointing with its increase as they only increased their annual payout by 2.7%. This is below the growth I need to meet my investing goals so I will continue to monitor for risk of growth falling further.

GSK had a decent year and it its showing as they increased annual dividend just slightly more than 5%.

TCAP was a real disappointment. I had been expecting a dividend increase announcement in February but instead they issued a special one-time dividend to be paid over two installments. While TCAP has performed wonderfully for me over the years the last year and six months have seen little growth putting TCAP on my watch list as a potential sell, I’m giving the company 6 more months before I make a final decision.

Speaking of dividend growth announcements I received increase announcements from APD, DPS, GIS, & PPL. Definitely looking forward to these increases in the next quarter.

As far as additional contributions I only managed to save $300 this quarter. Saving was tough even though my wife picked up a part-time job. We were continually hit with little unplanned expenses. New brakes for wife's mini-van, microwave died, snow-blower died, and it goes on and on. I would like to think unplanned expenses have ended but I fear this harsh winter may have caused more damage to the house & property of which we should discover as spring arrives and I have a chance to inspect. - Comments: 0

Build Diversity: Part 8 Conclusion - 30 Mar 2014 01:15

Tags: build_diversity

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The Build Diversity series was started to question a common misnomer that the selection of dividend growth companies is very limiting and the largest risk is lack of diversification.

After multiple screens we have identified 52 potential stocks spread over 11 sectors with market caps ranging from $17B to below $100M. We've seen results from momentum growth sectors (such as technology and healthcare), traditional dividend growth sectors (such as consumer staples), and defensive sectors (such as utilities & small local regional banks).

The search results were astounding and proved that dividend growth investing is not limited and has access to a large diversity of stocks in many shapes and sizes. Additionally, if we lowered the screen requirements on dividend yield to as low as 2% the universe of stocks available almost triples.

Whether or not dividend growth investing is the best strategy is arguable but to state you cannot adequately diversify is completely false. - Comments: 0

Build Diversity: Part 7 Materials & Utilities - 30 Mar 2014 00:47

Tags: build_diversity

All stock information will be culled from David Fish’s “Dividend Champions List” at http://dripinvesting.org/ which provides a list of all stocks that have continually grown their annual dividend payouts for 5 years or more in a row.

Welcome to Part 7 of our “Build Diversity” series. Today we will be looking at the Materials and Utility sectors.

To start with a list we will use basic search criteria of:
* min div yield near 3% or greater
* payout ratio near 65% or less
* debt to equity ratio less than 1

Company Symbol Yrs of Div Growth Div Yield Payout Ratio TTM P/E Debt/Equity
Material
BHP Billiton Ltd. BHP 11 3.43% 42.3% 12.35 0.50
BHP Billiton plc BBL 11 3.68% 42.3% 11.50 0.50
Compass Minerals International CMP 9 2.81% 61.7% 21.94 0.86
Sonoco Products Co. SON 31 2.95% 61.7% 20.89 0.70
Utilities
Conn. Water Service CTWS 44 3.01% 59.6% 19.78 0.92
MGE Energy Inc. MGEE 38 2.82% 52.8% 18.73 0.66
Northeast Utilities NU 16 3.53% 63.1% 17.85 0.99

The search yielded 7 stocks. For Material companies SON is the elder of the group with 31 years of continuous dividend growth. BHP & BBL offer the highest dividend yield and lowest P/E ratios but they also operate in volatile iron ore markets where spot prices have dramatic swings up and down.

For Utility companies CTWS & MGEE offer a long history of continuous dividend growth. What is most impressive of all three is that we actually found utility companies with low debt to equity ratios. One of the downsides of establishing a utility is the large infrastructure required for creating and/or delivering of utility services. Creating such a structure requires an immense amount of cash so most have a debt/equity ratio above 1.

Company Symbol 1 Yr DGR 3 Yr DGR 5 Yr DGR 10 Yr DGR
Materials
BHP Billiton Ltd. BHP 3.6% 10.1% 10.6% 22.3%
BHP Billiton plc BBL 3.6% 10.1% 10.6% 30.7%
Compass Minerals International CMP 10.1% 11.8% 10.2%
Sonoco Products Co. SON 3.4% 3.5% 2.8% 3.9%
Utilities
Conn. Water Service CTWS 2.1% 1.9% 2.2% 1.7%
MGE Energy Inc. MGEE 3.2% 2.6% 2.3% 1.8%
Northeast Utilities NU 11.1% 12.8% 12.2% 9.8%

Looking at dividend growth SON shows some pretty low growth but the trade-off is its long dividend growth history. On the utilities front it is not surprising to see low growth rates as these are low growth heavily regulated industries and typically make good defensive plays for your portfolio. It was interesting to find NU with a high growth rate and one would have to question how sustainable it is.

Our quick search has yielded 7 potentially attractive examples to add to your portfolio. Like any investment you should research further before purchasing any equity as this report is nothing more than a result of some surface level values and ratios.

BHP Billiton Ltd. (BHP): BHP Billiton Limited, together with its subsidiaries, operates as a diversified natural resources company worldwide. The company explores for, develops, produces, and markets petroleum, potash, aluminium, alumina, nickel, and manganese ore and alloys; and produces and exports seaborne metallurgical coal and thermal coal. In addition, the company explores for and produces copper, silver, lead, uranium, zinc, and iron ore.

BHP Billiton plc (BBL): BHP Billiton Plc, together with its subsidiaries, operates as a diversified natural resources company worldwide. The company is engaged in the exploration, development, and production of oil and gas; mining of metallurgical coal, thermal coal, copper, silver, lead, zinc, molybdenum, uranium, iron ore, and gold; mining and refining of bauxite into alumina, and smelting of alumina into aluminum metal; and mining and production of nickel products, manganese metal and alloys, as well as development of potash.

Compass Minerals International (CMP): Compass Minerals International, Inc., through its subsidiaries, produces and markets inorganic mineral products primarily in North America and the United Kingdom. It operates in two segments: Salt and Specialty Fertilizer.

Sonoco Products Co. (SON): Sonoco Products Company manufactures and sells industrial and consumer packaging products in the United States, Europe, and Canada. The company operates in four segments: Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions.

Conn. Water Service (CTWS): Connecticut Water Service, Inc., through its subsidiaries, operates as a regulated water company. The company operates in three segments: Water Activities, Real Estate Transactions, and Services and Rentals.

MGE Energy Inc. (MGEE): MGE Energy, Inc., through its subsidiaries, operates as a public utility holding company in Wisconsin. The company operates in 4 segments; Regulated Electric Utility, Regulated Gas Utility, Non-regulated Energy Operations, and Transmission Investments.

Northeast Utilities (NU): Northeast Utilities, a public utility company, through its subsidiaries, is engaged in the energy delivery business. The company is involved in generation, transmission, and distribution of electricity; and distribution of natural gas. - Comments: 0


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