Utilities, Today and Yesterday
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.