Differences In Utility

9/28/2015


Suppose we refer to utilities in a story read by subscribers Smith, who owns a water utility, and Jones, who owns a natural-gas utility with an energy-production business. The phrase “utility stock" may not mean the same for both subscribers because they own vastly different companies.

Our quarterly Utility Update, illustrates the variety within the sector. We divide the sector into six industries, each of which moves to a different beat, as shown in the table below.

Looking for yield? Electric, natural-gas, and diversified utilities lead the pack. Stocks in those same industries also average the highest Quadrix Value scores and the lowest price/earnings ratios. Electric, gas, and diversified utilities account for 82% of the 79 companies in our Utility Update and 93% of the total market capitalization. Many investors stop there. But if you seek growth next year and beyond, energy/utility hybrids look the best. If you prefer stocks with relative strength, electric, water, and natural-gas utilities have held up best over the last three and six months.

Rather than pick one or two stocks from this unexpectedly diverse sector, we advise subscribers seeking utility exposure to consider equal-weighted positions in the stocks from our Top 15 Utilities portfolio (see below for more on the Top 15 or visit www.DowTheory.com/go/Top15).

Utility Update

Our quarterly supplement ranks utilities A (above average), B (average), and C (below average). These ranks apply only to utilities; the average A-rated utility wouldn't qualify as an A on our Monitored List, where it would need to measure up to stocks in sectors with superior growth. Still, investors seeking utility exposure should start their analysis process with our A-rated stocks.

This week we're updating our rankings for the Utility Update and adding four new companies. When you visit the supplement, welcome new arrivals American Water Works ($54; AWK), Calpine ($15; CPN), Ferrellgas Partners ($22; FGP), and One Gas ($44; OGS).

UTILITY INDUSTRY COMPARISON
All of the numbers below other than company count and stock-market value are averages for groups within our Utility Update. We publish the Utility Update in the last issue of each quarter.
Stock-Market
---- Value ----
Total Return
--- P/E Ratio ---
Estimated
----- EPS Growth -----
----------- Quadrix Scores -----------
Utility Group
(No. Of Cos.)
Total For
Group
($Bil.)
% Of
Sector
Div.
Yield
(%)
3
Month
(%)
6
Month
(%)
Trailing
Versus
3-Year
Average
This
Year
(%)
Next
Year
(%)
Next
5 Yrs.
(Annual.)
(%)
Value
Overall
12-
Factor
Sector
Reranked
Overall
Diversified (18)
201.3
31
4.1
(2)
(8)
16
0.91
0
0
6
72
65
57
56
Electric (30)
355.7
54
3.8
3
(4)
17
0.98
0
1
5
67
59
48
48
Hybrid (3)
15.8
2
3.3
(17)
(18)
26
0.75
(27)
61
8
56
34
19
22
Natural Gas (17)
54.6
8
4.5
1
1
19
0.95
(3)
5
7
67
61
56
50
Power (3)
12.4
2
1.5
(23)
(26)
29
NM
38
(25)
15
70
62
42
23
Water (8)
18.4
3
2.9
4
0
20
0.96
1
2
7
55
68
41
54
Utility Update
(79)
658.2
100
3.8
0
(5)
18
0.95
0
3
6
67
61
50
49
Notes: Quadrix scores are percentile ranks, with 100 the best.   Some averages exclude outliers.     NM Not meaningful because companies lost money in earlier periods.

How we win with utilities

Since we started tracking the Top 15 Utilities at the start of 2007, the portfolio has returned 128.7%, nearly double the S&P 1500 Utility Sector Index's 66.6% return. Our utilities outperformed in six of the last eight calendar years and are on pace to beat the index again this year.

Our performance stands out because utility stocks are notoriously difficult to pick, in part because once you get under the hood, many of them look similar to others in their industry group. That said, here are five reasons why our utility selections have left the benchmark in the dust:

1) Quadrix. Our traditional Quadrix Overall score doesn't work as well for utilities as it does for many other sectors, but we've augmented it with sector-specific scores. In rolling 12-month periods since 1994, the top one-fifth of utilities as measured by Overall score outperformed the average utility by an average of 0.4%. Leaders in the 12-Factor Sector score and Reranked Overall score enjoyed 0.5% and 1.2% outperformance, respectively.

The traditional Overall score ranks all of the roughly 5,000 stocks in our research universe using the same criteria, while sector-specific scores are customized to emphasize statistics that work particularly well for utilities.

2) Diversification. Our insistence on 15 stocks can be a pain, mostly because we won't always find 15 we truly love. But the size of the portfolio helps insulate us against the possible implosion of one or two stocks. It also provides us with the freedom to include a broad sampling of the different types of utilities while at the same time overweighting those with the most investment appeal.

At the moment, four of the stocks (27% of the portfolio) fall in the natural-gas category, which also includes propane distributors. In contrast, natural gas accounts for just 21% of the companies and 8% of the market capitalization for stocks in our Utility Update (see pages 9 and 10).

3) Energy. Throughout much of the portfolio's history, we included companies with both utility and energy-production operations, a strategy that fueled market-beating returns. With oil and gas producers under pressure, we don't have any such stocks in the portfolio today.

4) Creativity. Three of the current components of our Top 15 are master limited partnerships (MLPs), two of which operate in the pipeline and storage space rather than distribution. Weakness among MLPs has provided appealing entry points, and at the moment the outlook for pipelines is rosier than for producers. MLPs aren't top of mind for most utility investors, but their rich yields and connection to the utility infrastructure make them solid options for the Top 15 Utilities.

5) Discipline. For generations, investors have treated utilities as buy-and-hold-forever stocks. However, such an approach makes less sense in today's market. Most utilities operate nonregulated businesses that can make operating results less predictable. Just as importantly, even traditional utilities can deliver widely divergent sales and profits, translating into dissimilar stock returns. We look at utilities as operating companies, not annuities or bond substitutes, and will bail out of weak options when it's time.

The Top 15 Utilities portfolio pays a yield comparable to that of the average utility while offering superior growth potential. Returns over the last eight years suggest the approach pays off.

TOP 15 UTILITIES
---------- Quadrix Scores ----------
Company (Price; Ticker)
Div.
($)
Yield
(%)
Trailing
P/E Ratio
Value
Overall
12-
Factor
Sector
Reranked
Overall
Industry
Allete ($49; ALE)
2.02
4.1
15
78
83
78
95
Electric
Alliant Energy
($57; LNT)
2.20
3.9
16
65
58
19
32
Electric
Atmos Energy
($57; ATO)
1.56
2.8
19
59
76
97
81
Natural gas
Avista ($32; AVA)
1.32
4.2
18
69
63
73
56
Diversified
CMS Energy
($34; CMS)
1.16
3.4
20
55
60
68
41
Diversified
EQT Midstream
($68; EQM)
2.56
3.7
15
62
92
55
87
Services
Laclede ($53; LG)
1.84
3.5
15
72
49
93
40
Natural gas
NextEra Energy
($97; NEE)
3.08
3.2
17
72
87
41
90
Electric
Portland General
($36; POR)
1.20
3.4
17
68
58
99
51
Electric
Public Svc. Ent.
($40; PEG)
1.56
3.9
14
82
85
92
97
Diversified
Scana ($53; SCG)
2.18
4.1
14
79
70
96
79
Diversified
Spectra Energy
($42; SEP)
2.45
5.9
13
66
81
74
82
Services
Star Gas ($9; SGU)
0.38
4.3
18
94
96
98
96
Natural gas
Unitil ($36; UTL)
1.40
3.9
19
70
74
88
86
Diversified
WGL Holdings
($54; WGL)
1.85
3.4
17
67
73
63
75
Natural gas
Top 15 Utilities
portfolio avg.
3.8
17
71
74
76
73
Note: Quadrix scores are percentile ranks, with 100 the best. 12-Factor Sector and Reranked Overall scores are designed to compare utilities to other utilities. Exception: EQT Midstream, Spectra, and Star Gas are master limited partnerships (MLPs), and we use 12-Factor and Reranked scores customized for MLPs.

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