OGE Energy Hikes Dividend

In order to share more profits with its shareholders, the board of directors of OGE Energy Corporation (OGE - Analyst Report) increased the company's quarterly dividend to $0.375 per share from $0.3625.

The increase is effective with the first-quarter 2011 dividend of $0.375 per common share of stock, to be paid on January 28, 2011, to shareowners of record as on January 10, 2011. This raises the annualized dividend of the company to $1.50 per share from $1.45.

Over the years, OGE Energy has rewarded shareholders by returning a substantial portion of its free cash flows through incremental dividend over the years with a yield of 3.6%. Looking ahead, the company’s dividend appears sustainable and secure, given management's stated goal of 2% dividend growth annually through 2012 along with investment grade credit ratings.

The company has a strong balance sheet among its peers with a low long-term debt-to-capitalization of 51.3% at the end of the first nine months of 2010 (Zacks industry average was 93.2%).

OGE Energy is the largest electric utility in Oklahoma, and its well positioned regulated utility and unregulated midstream gas businesses are low risk. The company is pursuing an aggressive energy efficiency program, investing in renewable energy technologies and upgrading its infrastructure.

The company is also focused on developing renewable energy projects and upgrading its distribution system. Recent investments (Redbud, wind development) have positioned the company in good stead to comply with environmental regulations and to meet its 5% – 7% long-term EPS growth target.

OGE Energy operates in Oklahoma, where unemployment is significantly lower than the national average. The current unemployment rate for the Oklahoma City metro area is 6.9%, which is below the national average of around 9.6%.

The resilience in the economy of its service area bodes well for the company. Also, OGE Energy is smart in leveraging the topography of Oklahoma to develop wind based energy assets. Looking forward, lower-than-average electricity rates provide the company with significant scope for growth.

However, OGE Energy’s utility operations are subject to federal, state and local legislative requirements, as well as extensive environmental regulations. Change in the regulatory environment could also impact the company’s earnings.

Inability to comply with various laws and regulations and obtain fair and timely rate relief and requisite regulatory approvals could have an adverse impact upon its future earnings and growth.

Thus, we reiterate our Neutral recommendation on the Zacks #3 Rank (Hold) stock. In the near-term the stock will trade in line with its Zacks #3 Rank peers like El Paso Electric Company (EE - Snapshot Report) and Pampa Energia SA (PAM - Snapshot Report).

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