A Utility Variety Pack

8/8/2016


We've written a lot about utilities in recent months, making a few key points worth repeating again:

• As a group, utilities have unimpressive fundamentals. The stocks in our quarterly Utility Update (www.DowTheory.com/Go/Utilities) average Quadrix Overall scores of 46, with average scores below 50 in the three most important Quadrix categories — Momentum, Value, and Quality.

• In the wake of strong returns, utilities look unusually expensive.

• With utilities, seek safety in numbers. Our Top 15 Utilities portfolio (www.DowTheory.com/Go/Top15) is designed to provide income comparable to that of the average utility with superior growth potential. Investors should purchase equal-dollar amounts of each stock listed in the table on page 2.

This week, we review three intriguing stocks from our Top 15 Utilities portfolio. Each differentiates itself in a different way:

Growth

In the utility sector, growth is a relative term. The average stock in our Utility Update saw per-share profits fall 3% over the last year. UGI ($46, UGI), which generates most of its revenue from a natural-gas utility and units that distribute propane and liquid petroleum gas, posted per-share profits of $0.23 in the June quarter, up from $0.07 in the year-ago quarter, topping the consensus by $0.16. Analysts expect that growth to continue, projecting gains to double in the September quarter and rise 18% in the fiscal year ending September 2017. UGI, yielding 2.1%, earns a Quadrix Overall score of 66 (high for a utility) and scores at least 90 for both sector scores.

Value

Genuine values are scarce in the utility sector these days. The S&P 1500 Utility Sector Index has returned 22% so far this year, No. 2 among the broad index's 10 sectors. Against that backdrop, Star Gas Partners ($9; SGU) stands out from the rest. The propane distributor's Quadrix Value score of 85 is tops in the sector. It trades at 13 times trailing earnings and a 9% discount to its five-year average. In contrast, the average stock in our Utility Update has a P/E ratio of 23 and fetches a 24% premium to its five-year average. Star Gas, which yields a generous 4.8%, is a master limited partnership (MLP).

Plain vanilla

In recent years, utilities have invested heavily in nonregulated business, both to diversify and to boost growth. Most of our favorite utilities do more than just distribute electricity or natural gas. However, we appreciate the classics, and many investors find it comforting to own a stock with a regulated revenue stream. Avista ($43; AVA) generates more than 98% of its revenue via regulated electric and natural-gas utilities. The company serves 387,000 electric customers and 331,000 natural-gas customers in the Pacific Northwest and Alaska. In Avista's case, regulated does not equate to stodgy, as the company has posted at least 7% per-share-profit growth in each of the last four quarters.

TOP 15 UTILITIES
Since its inception in 2007, our Top 15 Utilities portfolio has delivered a total return of 201.5%, well above the S&P 1500 Utility Sector Index's 113.5% return. Our utilities have outperformed in seven of the last nine calendar years.
--- P/E Ratio ---
------------ Quadrix Scores ------------
Company
(Price; Ticker)
Div.
Yield
Trailing
Versus
5-Yr.
Avg.
Value
Overall
12-
Factor
Sector
Reranked
Overall
Industry
Allete ($63; ALE)
3.3
18
1.03
57
50
86
83
Electric
Atmos Energy
($79; ATO)
2.1
25
1.38
32
47
56
39
Natural gas
Avista ($43; AVA)
3.2
21
1.21
45
57
71
82
Diversified
CMS Energy
($44; CMS)
2.8
23
1.36
40
60
58
81
Diversified
Entergy
($80; ETR)
4.2
14
1.19
64
37
82
51
Electric
EQT Mid. Ptnrs.
($78; EQM)
4.0
14
0.68
73
95
19
97
Services
NextEra Energy
($128; NEE)
2.7
22
1.28
39
33
22
14
Electric
Otter Tail
($35; OTTR)
3.6
22
0.92
45
67
82
92
Diversified
Portland General
($43; POR)
2.9
21
1.27
50
39
76
38
Electric
Public Service
Ent. ($45; PEG)
3.7
16
1.25
56
38
51
36
Diversified
Scana ($74; SCG)
3.1
21
1.36
40
49
69
64
Diversified
Spectra Engy.
Ptnrs. ($48; SEP)
5.4
14
0.91
62
72
87
85
Services
Star Gas Partners
($9; SGU)
4.8
13
0.91
85
64
67
96
Natural gas
UGI ($46; UGI)
2.1
25
0.83
46
66
100
90
Natural gas
Unitil ($42; UTL)
3.4
24
1.22
44
53
79
72
Diversified
Portfolio average
3.4
19
1.12
52
55
67
68
Average for
Utility Update
3.2
23
1.24
43
46
49
50
Note: Quadrix scores are percentile ranks, with 100 the best. The sector-specific ranks (12-Factor and Reranked Overall) for EQT Midstream Partners and Spectra Energy Partners are special scores we developed for master limited partnerships (MLPs).

 


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