Want Utilities? We've Got 'Em
It's easy to come up with reasons not to buy utility stocks. Here are three:
• Our Quadrix stock-rating system doesn't like the sector. Utility stocks in the S&P 1500 Index average Overall ranks of 37, by far the lowest of the 10 market sectors. None of the index's 65 utilities score above 80 Overall. Utilities also score the lowest for Momentum.
• The sector's earnings outlook calls for patience. Consensus estimates project the S&P 1500 Utilities Sector Index's per-share profits will decline 6% in fiscal 2012, by far the worst performance of the 10 market sectors.
• The utility index has outperformed the broader S&P 1500 Index in six of the last eight calendar years. While the outperformance is noteworthy, it has left the sector far from cheap. The average utility trades at 16 times trailing earnings, a 7% premium to its three-year average.
However, dividend yields have held up in the wake of last year's rally, when the sector index returned 19.4%, the strongest performance since 2006. The average utility yields 3.9%, only slightly below the sector's five-year average of 4.1%. Despite the sector's blemishes, those fat yields still attract investors.
Income-minded investors can tap into the dividend-rich sector via our Top 15 Utilities portfolio, which focuses on the strongest names in the group. The portfolio has topped its benchmark, the S&P 1500 Utilities Sector Index, in four straight years. That trend continues into 2012, with our portfolio delivering a total return of 0.40%, while its benchmark has lost 0.05%.
Today we are making a change to the Top 15 Utilities portfolio. El Paso Electric ($30; EE) is being dropped. The stock looks fairly cheap, but it has declined 10% over the last three months. El Paso fell short of profit estimates in the last two quarters, and the consensus is falling. To replace El Paso, we are adding NextEra Energy ($64; NEE), which supplies electricity to 4.6 million customers in Florida. NextEra grew profits 36% over the last 12 months, and it earns an Overall score of 75, the second-highest in the sector. The consensus projects per-share-profit growth of 3% this year and 9% next year.