Utilities, Today and Yesterday

8/12/2013


If you haven't checked out utilities for awhile, get ready for a shock, because today's crop looks different.

With an average gross profit margin of 29%, utilities are more profitable than at any time in the last 15 years. S&P 1500 Index utilities average one-year earnings growth (5%) and Quadrix scores for Momentum (55) and Earnings Estimates (56) well above long-run averages.

In many ways, however, utilities haven't changed. They average mediocre Overall scores of 52, roughly in line with the 10-year average, and 3.5% yields, below the 10-year average yield of 3.8%. Utilities have long been known for fat yields and slim growth, and their average estimate for five-year profit growth of 4.7% is the lowest in more than nine years.

Perhaps the biggest difference between today's utilities and yesterday's revolves around valuation. S&P 1500 utility stocks average price/earnings ratios of 18, price/sales ratios of 1.7, and price/book ratios of 1.9 — all three at least 15% above five-year averages. Utilities average Value scores of 60, near the five-year average of 62 but well below the average of 70 since 1994.

Our advice? Focus on only the best stocks, and spread your bets in a sector that's riskier than many people realize. Readers seeking utility exposure should check out our Top 15 Utilities portfolio (on page 12 and at www.DowTheory/Go/Top15), which has returned 24.2% so far this year versus 15.6% for the S&P 1500 Utility Sector Index. This week, we're making changes to the portfolio.

Two stocks in: Alliant Energy's ($53; LNT) well-defined, if moderate, growth potential makes it a safe pick. The company has topped the profit consensus by at least 7% in four of the last five quarters. Southwest Gas ($49; SWX), despite above-average profit- and dividend-growth potential, looks cheap relative to its gas-utility peers.

Two stocks out: Shares of South Jersey Industries ($61; SJI) have performed well despite weak operating momentum and declining profit margins. Public Service Enterprise ($34; PEG) has not delivered much sales and profit growth recently, and we fear the stock will not meet expectations.

HISTORICAL COMPARISON
All of the data below represent averages for utility stocks in the S&P 1500 Index, either at a certain point or over a period of time. Today, utilities boast unusually high profit growth and profit margins relative to historical norms but trade well above long-run averages in price/earnings, price/sales, and price/book ratio.
Div.
Yield
(%)
Div.
Payout
Ratio
(%)
---------------- Quadrix Scores ----------------
1-Year
Earnings
Growth
(%)
----- Valuation Ratios -----

Est. L-T
Profit
Growth
(%)

Gross
Profit
Margin
Selection Date
Momen-
tum
Value
Fin'l
Str.
Earns.
Ests.
Overall
Price/
Earnings
Price/
Sales
Price/
Book
Today
3.5
61
55
60
52
56
52
5
18.1
1.7
1.9
4.7
29
5 Yrs. Ago
3.7
56
52
60
44
57
52
5
16.9
1.2
1.9
7.9
23
10 Yrs. Ago
3.8
51
43
82
45
44 *
57
(13)
15.9
1.0
1.5
5.9
23
15 Yrs. Ago.
4.6
63
42
71
50
NA
49
(2)
18.8
1.2
1.8
6.5
27
End of 1994
6.1
71
36
75
47
NA
49
5
14.0
1.1
1.4
6.5
29
                           
5-Yr. Avg.
4.1
57
46
62
49
50
52
1
15.8
1.2
1.6
5.9
26
10-Yr. Avg.
3.7
55
45
67
44
51 *
51
1
16.6
1.2
1.8
6.1
24
15-Yr. Avg.
3.9
55
47
68
46
NA
53
(1)
16.6
1.2
1.8
6.2
24
Avg. Since 1994
4.2
58
46
70
47
NA
53
0
16.4
1.2
1.7
6.3
25
* Calculated since February 2004, our earliest Earnings Estimates data.     NA Not available.     † Percentile ranks, with 100 the best.     

 


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