What To Expect From Utilities

9/29/2014


Utilities divide investors. Income-oriented investors love them, while those seeking growth tend to dismiss them.

This year utility lovers have been rewarded, with the S&P 1500 Utility Sector Index returning about 12%, four percentage points more than the broad index. For the year ahead, we look at three key considerations.

Returns: Utilities have lagged over the last five years, a friendly period for the broad market, which returned an annualized 16%. However, utilities outperformed over the last decade, returning an annualized 10% versus 8% for the broad index.

Ten years ago, many pundits projected market-lagging long-run returns for utilities, which had underperformed substantially during the previous 10 years. You don't hear that as often these days. Utilities tend toward market-beating returns when stocks are weak and underperformance when stocks are strong.

Quadrix scores: In the 237 month-ends since the S&P 1500 Index's inception at the end of 1994, utilities earned the highest average Overall score of any sector only once — at the end of May, with an average of 67. Today, index utilities earn an average Overall score of 60, good for sixth among the 10 sectors and above the norm of 53 for utilities since 1994. Credit the higher Overall score in part to average Momentum scores of 53 — not great, but above the long-run average of 47, helped by solid growth during the harsh winter.

Valuation: The sector's average Quadrix Value score is 70 — by far the highest among the sectors but in line with the long-run average. The average utility trades at 17 times trailing earnings (6% above the five-year average) and 1.8 times book value (10%). Most other stocks also trade at a premium to historical norms. In fact, stocks in five of the other nine sectors average a greater premium to five-year norms for price/earnings while eight look more expensive on price/book.

Utilities boast higher Quadrix scores than usual and trade at decent — if not overly cheap — valuations. However, few individual utilities offer the mix of growth, valuation, and potential to surprise that we seek. Despite the sector's higher-than-usual average Overall score, only one of the S&P 1500's 59 utilities scores above 90, with five in the 80s — lots of solid stocks but few greats. Only one utility, UGI ($34; UGI), is on our buy lists.

For investors who seek greater utility exposure, we recommend safety in numbers with our Top 15 Utilities portfolio, presented nearby. The Top 15 provides a yield comparable to that of the average utility and superior capital-gains potential.

Since its inception in 2007, the Top 15 Utilities portfolio has returned 111%, versus 61% for the S&P 1500 Utility Sector Index.

TOP 15 UTILITIES
Price/Earnings
Price/Book
Quadrix Scores
Company (Price; Ticker)
Div.
($)
Yield
(%)
Trailing
Vs. 5-
Yr. Avg.
Trailing
Vs. 5-
Yr. Avg.
Value
Overall
AGL Resources
($51; GAS)
1.96
3.8
12
0.85
1.6
1.00
92
92
Alliant Energy
($56; LNT)
2.04
3.6
16
1.03
1.9
1.18
70
60
AmeriGas ($45; APU)
3.52
7.8
16
0.65
2.9
0.68
75
61
Atmos Energy
($48; ATO)
1.48
3.1
17
1.06
1.6
1.14
72
71
Avista ($31; AVA)
1.27
4.1
15
0.99
1.3
1.09
80
69
CMS Energy
($30; CMS)
1.08
3.6
16
1.03
2.2
1.21
79
79
DTE Energy ($76; DTE)
2.76
3.6
17
1.11
1.7
1.23
72
70
Empire Dist. Elect.
($24; EDE)
1.02
4.2
15
0.92
1.4
1.08
82
69
Idacorp ($54; IDA)
1.72
3.2
13
0.80
1.4
1.14
72
79
Laclede Group
($46; LG)
1.76
3.8
16
1.06
1.1
0.71
74
61
Otter Tail ($27; OTTR)
1.21
4.5
15
0.49
1.8
1.18
88
80
PNM Resources
($26; PNM)
0.74
2.9
18
0.82
1.2
1.29
71
65
Scana ($49; SCG)
2.10
4.3
13
0.93
1.4
0.99
86
74
UGI ($34; UGI)
0.87
2.6
17
1.15
2.2
1.24
71
84
Westar Energy
($34; WR)
1.40
4.1
15
1.01
1.5
1.14
78
81
Top 15 average
3.9
15
0.93
1.7
1.09
77
73
S&P 1500 utility
sector average
3.6
17
1.06
1.8
1.10
70
60
Note: Quadrix scores are percentile ranks, with 100 the best.

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