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The Board of Directors of Pinnacle West Capital Corp. (PNW - Analyst Report) approved a quarterly dividend hike of 4% or 2.25 cents to 56.75 cents per share. This brings the annual dividend to $2.27 per share, reflecting a yield of 3.95%, substantially higher than the industry average of 1.98%.

The revised dividend will be payable on Dec 2, 2013, to shareholders of record on Nov 1, 2013. An increasing cash balance and a healthy operating cash flow position have triggered the hike in dividend.

The company maintained a constant dividend payout during the economic recession. In Oct 2012, the company increased its dividend by 3.8% to 54.5 cents per share from 52.5 cents per share.

Other utility companies that have raised their quarterly dividend in 2013 include IdaCorp Inc. (IDA - Snapshot Report) which increased quarterly dividend by 13.2%, American Electric Power Company Inc. (AEP - Analyst Report) which boosted quarterly dividend by 2% and Questar Corp. (STR - Analyst Report) which augmented dividend by 6%.

Pinnacle West’s cash balance rose 6.1% to $27.8 million as of Jun 30, 2013 from $26.2 million as of Dec 31, 2012. In the first half of 2013, the company utilized $116.2 million for dividend payment. In addition, the strong cash flow position which was $454.3 million in the first half of 2013 will enable the company to easily meet the increased dividend burden.

Pinnacle West’s high-growth solar projects, a steady recovery in the Arizona economy and a concomitant rise in the customer base were the main performance drivers. These factors have led the company to report earnings surprises in three out of the last four quarters, with an average beat of 54.70%.

We believe Pinnacle West’s flagship AZ Sun program and systematic investments in transmission assets will help the company to register solid performance as well as aid in achieving its annual dividend growth target of 4% in the coming years.

However, the ongoing water scarcity issues in the U.S. of which Arizona is a part might create operational difficulties as Pinnacle West’s generating plants require considerable supplies of water. At the moment, the company carries a Zacks Rank #3 (Hold).

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