Dear Mr. Berko: I’m in despair over these low CD rates. I’ve got $272,000 in CDs and used to get 5 percent to 5.5 percent. I just had my last CD come due that paid 5.2 percent, and I may have to get a part-time job if rates stay this low. So my broker recommended Ameren, a utility stock that pays a dividend of $1.54 and yields 5.3 percent. He said the dividend is safe and wants me to buy 1,000 shares with some of the money coming due from my $57,000 CD. What do you think? How come an electric utility has such a strange name? — W.P., Springfield, Ill.
Dear W.P.: I don’t know how the idiots at Ameren (AEE, $29.32) came up with that crazy name. But it’s a nonsense word for which no one could find an application. So when management at Union Electric decided to merge with Central Illinois Public Service, Central Illinois Light and Illinois Power, it decided to purchase (for an undisclosed sum) all the rights and attendant uses to that combination of syllables.
Meanwhile, this electric and gas utility provides electricity to 1.2 million folks in Missouri, as well as gas to another 126,000 Missourians. And in Illinois, AEE also provides 1.2 million customers with electricity, plus gas to 810,000 homes and businesses.
About 68 percent of its generating source derives from nuclear plants, 11 percent from hydro, 2 percent from gas, and 21 percent of its power is purchased. But AEE has two strikes against it. It’s home-ported in St. Louis — which recently earned the distinction of overtaking Camden, N.J., as America’s most dangerous city — and 70 percent of its revenues originate in Illinois, a state whose credit rating is worse than California’s.
This utility, which employs 9,800 good people, is a mess. The average age of its plant and equipment is 14.6 years. Still, the state of Illinois only granted a $35 million electric rate increase, and its gas tariffs were recently reduced by $20 million. As a result, AEE’s management was forced to drastically cut its operating and capital budgets.
And it’s interesting to note that one of the medium big shots at AEE told me in frustration that: “The annual graft in the Illinois legislature exceeds our rate request by a factor of 10.” Surely, he exaggerates a little bit.
Meanwhile, the share price of this $7.6 billion revenue company has been on an unending decline from $55 per share in 2006, imploding to $20 in 2009. And the only reason the stock is trading at $29.32 today is that AEE’s $1.54 dividend (which is safe, but the stock price is not) yields 5.3 percent. This dividend hasn’t been increased since the Civil War, and earnings have been on an impressive decline in the past five years from $3.13 to $2.35. And there appears to be little prospect for improvement in AEE’s earnings or dividend this century.
Perhaps a bright spot in the AEE picture could be its $34.55 book value, which is 5 points above the market price. You might buy 1,000 shares and hope AEE declares bankruptcy so when all its debts are paid off, the shareholders will be entitled to the difference between the book value ($34.55) less your share cost ($29.32) less lawyer’s fees ($4.06) or about 70 cents per share.
Merrill Lynch, Goldman Sachs, Wells Fargo, JPMorgan and Barclays cover the stock, and not one of them has a “buy” recommendation. So next time you stand close to your broker, listen carefully, and if you can hear the ocean roar, get rid of him.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.