Our Utilities Win For 4th Year

2/13/2012


Since its inception at the start of 2007, the Top 15 Utilities Portfolio has delivered a total return of 38.8%, well above the 19.8% return of the S&P 1500 Utility Sector Index and the broader S&P 1500 Index's 8.3% return. Our portfolio outperformed the utility sector index in 2011, as well as in each of the previous three calendar years.

In a sector with as much parity as utilities, we don't try to identify just one or two high-quality stocks and hold them. So far, our safety-in-numbers strategy has paid off because of our willingness to do three things:

Sell stocks. Many investors, once they purchase a utility, will hold it for many years, through the ups and the downs. But companies change, and situations change. We don't target a lot of turnover in this portfolio, but we aren't afraid to make changes when a stock is no longer among our favorite 15. In the last five calendar years, we averaged eight buys and eight sells per year. That's enough to replace weaker stocks, but not so much that transaction costs eat up too much of the return. Today, we are making another change.

Alliant Energy's ($43; LNT) recent operating results have been unimpressive. Per-share profits fell 1% in the 12 months ended September, punctuated by an 18% decline in the September quarter. Despite those weak results, the stock has performed well, returning 20% over the last year. In the wake of that gain, the shares trade at a premium to their three-year average based on price/earnings, price/sales, and price/book ratios. The stock is being dropped from the Top 15 Utilities portfolio and downgraded to B (average) in our Utility Update.


Wisconsin Energy ($35; WEC) has managed per-share-profit growth of at least 10% in six of the last seven quarters, with operating profit margins expanding by nearly nine percentage points along the way. Wisconsin Energy, which serves 1.1 million electric customers and 1 million natural-gas customers, is not cheap. But the valuation seems reasonable considering the company's reliable growth. The company raised its dividend 15% in January and now yields 3.4%. Wisconsin Energy is being added to the Top 15 Utilities portfolio.

Look beyond yield. Some of the stocks in our portfolio yield well below the industry average, while others have higher yields. We consider yield but also look at valuation, growth factors, and intangibles such as regulatory developments, which are crucial for utilities. Based on equal-dollar amounts of each of the 15 stocks, the Top 15 Utilities portfolio yields 3.9%, roughly in line with the average utility stock.

Be flexible. In a perfect world, we would only buy stocks with high Quadrix Overall scores. But the utility sector doesn't give us that option. Of the 67 utility stocks in the S&P 1500, only three earn Overall scores above 80. Our 15 utilities average an Overall score of 62, which doesn't sound impressive relative to the market but is good for a utility portfolio.

TOP 15 UTILITIES PORTFOLIO
Sector-Specific
------ Scores ------
Company (Price; Ticker)
Div.
Yield
(%)
Trailing
P/E
Ratio
Quadrix
Overall
Score
12-
Factor
Sector
Reranked
Overall
Industry
American Electric
Power ($40; AEP)
4.7
13
49
92
85
Electric
American States
Water ($37; AWR)
3.0
17
85
95
99
Water
Cleco ($40; CNL)
3.2
16
80
89
96
Electric
CMS Energy ($22; CMS)
4.4
15
56
46
76
Diversified
Duke Energy ($21; DUK)
4.7
15
45
78
77
Electric
El Paso Electric ($34; EE)
2.6
13
85
70
95
Electric
Energen ($50; EGN)
1.1
12
37
85
61
Hybrids
Entergy ($68; ETR)
4.9
9
61
97
94
Electric
Exelon ($40; EXC)
5.2
10
40
86
58
Diversified
Laclede Group ($42; LG)
3.9
15
48
41
70
Nat'l Gas
PPL ($28; PPL)
5.1
10
76
100
97
Diversified
Public Svc. Enterpr. Grp.
($31; PEG)
4.5
11
67
99
92
Diversified
Sempra Energy ($58; SRE)
3.3
13
92
96
100
Diversified
UniSource Energy
($38; UNS)
4.4
14
49
63
73
Electric
Wisconsin Energy
($35; WEC)
3.4
16
58
68
80
Diversified
Portfolio Average
3.9
13
62
80
84
Note: Quadrix Overall and sector scores are percentile ranks, with 100 the best.

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