Utility stocks share the pain

11/10/2008


In this year’s market meltdown, stock investors have had nowhere to hide.

All 10 sector indexes within the S&P 1500 Index are down at least 13% so far this year, and the S&P 1500 itself is down 31%. The utility sector is down 28% — better than most sectors, though that probably doesn’t make utility shareholders feel any better. While our Top 15 Utilities portfolio is also down for the year, it has outperformed the benchmark sector index by more than four percentage points.

The market has been tough on dividend-paying stocks, particularly financials. While utilities have held up better than most income stocks, many individual utilities have dropped sharply — a reminder that buying just one or two supposedly “safe” stocks can expose you to more risk than is wise.

Our Top 15 Utilities portfolio offers an alternative, a diversified group of utilities that provides income comparable to that of the S&P 1500 Utility Sector Index, along with superior growth potential. The Top 15 portfolio features a mix of electric, natural-gas, and diversified utilities, along with three utility/energy hybrids that both produce natural gas and operate gas utilities.

We advise investors interested in utilities to purchase equal-dollar positions in each of the 15 stocks. To keep the Top 15 Utilities portfolio ahead of the market, we manage it actively, replacing weaker stocks with new blood when necessary. This week, we make a change.

Allete ($36; NYSE: ALE) operates a real-estate business hurt by Florida’s falling property values. In the nine months ended September, real-estate profits fell 86%, more than offsetting gains from the regulated utility and transmission businesses.

While Allete has rebound potential, owning the stock for the next year requires some confidence in the recovery of the Florida real-estate market — confidence the Forecasts does not have. Allete retains its A rating in the Utility Update but no longer ranks among our Top 15. Subscribers tracking the Top 15 Utilities portfolio should sell Allete.


Replacing Allete in the Top 15 portfolio is Dominion Resources ($36; NYSE: D), which has managed solid profit growth in recent quarters because of sales growth and higher margins. The diversified utility generates more than 60% of revenue from power generation, a business with solid long-term prospects.

In October, Dominion provided optimistic profit guidance through the end of 2009. With a Quadrix Overall score of 70 and a Utility Sector Score of 89, Dominion represents a mix of attractive valuation and above-average growth potential. The stock is being added to the Top 15 Utilities Portfolio.

TOP 15 UTILITIES PORTFOLIO
Est. EPS
Growth
Next 5
Years
(Ann.)
(%)
Quadrix
—— Scores ——
Company (Price; Ticker)
Div.
Yield
(%)
Payout
Ratio
(%)
Trail.
P/E
Ratio
Overall

Utility
Sector

Industry
Allegheny Energy
($30; AYE)
2.0
25
13
19
88
96
Electric
Alliant Energy
($30; LNT)
4.7
52
11
7
69
92
Electric
American Elec.
Power ($33; AEP)
5.0
48
10
5
48
94
Electric
CenterPoint
Energy ($12; CNP)
6.3
58
9
18
65
100
Diversified
Dominion Resources
($37; D)
4.3
55
13
8
70
89
Diversified
DPL ($22; DPL)
5.0
60
12
11
64
65
Electric
Duke Energy
($17; DUK)
5.4
64
12
4
48
70
Diversified
Energen
($33; EGN)
1.5
10
7
11
83
75
Hybrid
MDU Resources
Grp. ($19; MDU)
3.3
29
9
14
81
59
Hybrid
OGE Energy
($26; OGE)
5.3
55
10
NA
71
86
Diversified
Pepco Holdings
($20; POM)
5.3
54
10
9
69
52
Electric
Questar
($34; STR)
1.5
15
10
9
92
72
Hybrid
UGI ($24; UGI)
3.2
38
12
6
67
83
Diversified
Vectren
($25; VVC)
5.3
78
15
6
48
32
Diversified
WGL Holdings
($33; WGL)
4.4
60
14
4
42
20
Natural Gas
Top 15 average
4.2
47
11
9
67
72
Average for
S&P 1500 utilities
4.3
56
13
8
53
50
Notes: Quadrix scores are percentile ranks, with 100 the best.  The Utility Sector score is calculated using 12 statistics that work particularly well for utilities.  Averages exclude P/E ratios below 0 or above 75 and growth rates above 100%.  NA Not available.

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