Top Utilities For Value, Growth, And Yield

6/26/2017


With S&P 1500 Index utility stocks averaging Quadrix Overall scores of 53 and just two scoring above 80, it's no surprise that none of them makes our Buy List.

The story below gets into more detail on why utilities rarely end up on our recommended lists, but the fact that no utilities earn Buy ratings right now doesn't mean they all deserve a place in the wastebasket. The table below presents the Top 15 Utilities portfolio, our preferred method for gaining utility exposure.

Our Top 15 Utilities portfolio is a diversified basket of utilities and companies that serve the utility infrastructure. If you wish to follow this portfolio, which has outperformed the S&P 1500 Utility Sector Index handily since its inception in 2007 (242% total return versus 120%), put equal dollar amounts in each of the stocks in the table below.

In the following paragraphs, we discuss changes to the portfolio, then present our favorite utilities for growth, value, and yield.

SJW ($51; SJW) and WGL Holdings ($84; WGL) are coming off the Top 15 Utilities Portfolio, replaced by DTE Energy ($110; DTE) and NiSource ($26; NI).

DTE provides electricity to 2.1 million customers and natural gas to 1.3 million, all in Michigan. Longtime readers will recognize DTE as a former component of the Top 15 that was sold in part because the stock got too expensive. That's no longer the case. Big, strong, and fairly safe, DTE appears decently valued despite strong recent performance. Over the last year, the shares returned 22%, powered by sales growth of 14% and a 32% rise in per-share earnings. While DTE seems unlikely to provide any big surprises, either to the upside or downside, we appreciate the company's recent growth and ability to outperform expectations. The company exceeded consensus profit estimates by at least 10% in three of the last four quarters. DTE yields 3.0%.


NiSource has delivered four consecutive quarters of double-digit profit growth, while sales have risen 10% over the last year. In the wake of a spin-off of its pipeline business, the company's growth should be fairly steady going forward. The consensus projects per-share-profit growth of 8% this year, 6% next year, and 7% annually over the next five years. Consensus targets are on the rise, and NiSource may be able to exceed expectations. NiSource, which provides electricity and/or natural gas to 4 million customers throughout the Midwest and Mid-Atlantic states, expects to grow both profits and dividends at a 5% to 7% annual rate through 2020. NiSource yields 2.7%.


Water utility SJW has lagged the sector, falling more than 5% over the last six months. The company continues to generate solid cash flow, and the shares seem cheap relative to peers. But its Quadrix sector-specific scores have dipped below 35. Growth has slowed in recent quarters, and cost pressures are mounting. SJW should be sold.


We held onto WGL after it agreed in January to be purchased by AltaGas ($23; ATGFF). The shares were trading well below the $88 takeover price, leaving room for gains heading into the deal, and the company remained solid fundamentally. While the shares are still about $4 below the takeover price, WGL's operating momentum and estimate trends have weakened in recent months. Also, its Quadrix sector-specific scores have declined. Subscribers should sell WGL.

Top picks

Below are our favorite picks from the Top 15 Utilities portfolio in three categories:

Growth: Great Plains Energy ($30; GXP), a Missouri electricity provider, grew sales 6% and per-share-profits 20% over the last year.

Value: Edison International ($81; EIX) trades at 19 times trailing earnings and 2.2 times trailing sales, both at least 15% below the average for utilities in the S&P 1500 Index.

Yield: Pipeline operator EQT Midstream ($72; EQM), a master limited partnership, yields 5.0%, the highest in the Top 15 portfolio.

Top 15 UTILITIES
12-Month
--- Change ---
Average
--- Valuation ---
---------------------------------------- Quadrix Scores ----------------------------------------
Company (Price; Ticker)
Div.
Yield
(%)
Sales
(%)
Per-
Share
Profits
(%)
Price/
Earnings
Price/
Sales
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
12-
Factor
Sector
Reranked
Overall
Atmos Energy
($84; ATO)
2.1
6
15
23
2.9
54
40
62
82
78
64
58
58
48
DTE Energy
($110; DTE)
3.0
14
32
20
1.8
74
57
59
60
70
66
74
88
94
Edison Int'l
($81; EIX)
2.7
4
44
19
2.2
61
56
65
82
54
55
67
64
75
Entergy ($79; ETR)
4.4
(3)
9
12
1.3
26
73
15
27
18
58
32
63
33
EQT Midstream
Part. ($72; EQM)
5.0
18
6
13
7.6
47
89
96
97
42
22
89
64
100
Eversource Energy
($63; ES)
3.0
3
9
21
2.6
68
58
52
81
94
64
76
79
96
Great Plains
Energy ($30; GXP)
3.7
6
20
16
2.4
32
72
39
58
19
46
43
60
39
NextEra Energy
($141; NEE)
2.8
(5)
1
22
4.1
56
49
65
84
30
71
58
75
57
NiSource ($26; NI)
2.7
10
51
22
1.8
81
71
34
69
89
67
80
88
99
Portland General
($48; POR)
2.9
3
10
21
2.2
65
59
47
72
54
57
62
97
78
Scana ($70; SCG)
3.5
2
13
17
1.7
53
67
53
67
58
33
61
55
60
Star Gas Partners
($11; SGU)
4.2
9
(28)
22
0.5
27
50
67
51
78
69
54
76
46
UGI ($50; UGI)
2.0
3
57
21
1.5
51
66
67
62
41
59
67
94
88
Unitil ($49; UTL)
3.0
1
21
24
1.8
58
47
43
75
89
69
59
72
64
Vectren
($60; VVC)
2.8
8
16
23
2.0
79
48
58
77
56
68
68
91
82
Top 15 average
3.2
5
19
20
2.4
55
60
55
70
58
58
63
75
70
Note: Quadrix scores are percentile ranks, with 100 the best. Our sector-specific scores rank stocks relative to others in the sector, while traditional scores rank stocks relative to the roughly 5,000 U.S.-traded stocks in our research universe.     NM Not meaningful because neither company made a profit in the year-earlier period.     NA Not available.

 

SECTOR COMPARISONS
Diversified and electric utilities in the S&P 1500 Index earn the strongest Quadrix Overall scores, while power and water companies look particularly weak. As a sector, utilities have weaker fundamentals than the broad market. And despite lower average price/earnings and price/sales ratios, utilities earn slightly lower Value scores, in part because they look unusually expensive relative to their history.
Avg. 12-Mo.
--- Change ---
Average
--- Valuation ---
----------------------------------- Average Quadrix Scores -----------------------------------
Sector
(Number Of Cos.)
Div.
Yield
(%)
Sales
(%)
Per-
Share
Profits
(%)
Price/
Earnings
Price/
Sales
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
12-
Factor
Sector

Reranked
Overall
Diversified (16)
3.2
7
13
21
2.2
57
59
48
69
66
56
61
62
68
Electric (22)
3.3
3
11
19
2.4
53
59
43
63
53
56
54
59
59
Gas (10)
2.5
7
13
24
2.2
47
47
49
68
43
56
46
45
37
Power (2)
2.4
(7)
NM
14
0.5
39
75
16
14
59
56
44
37
53
Water (4)
2.0
1
10
29
4.7
55
27
56
82
42
60
39
10
15
Utility sector
(54)
3.0
4
12
21
2.4
53
55
46
65
54
56
53
50
50
S&P 1500 Index
(1,500)
1.6
6
4
23
2.9
51
56
62
58
52
50
59
50
50
Notes: Quadrix scores are percentile ranks, with 100 the best. Our sector-specific scores rank stocks relative to others in the sector, while traditional scores rank stocks relative to the roughly 5,000 U.S.-traded stocks in our research universe.     Average growth rates and valuations exclude some outliers.     NM Not meaningful because neither company made a profit in the year-earlier period.

How to play utilities

The S&P 1500 Utility Sector Index has returned 12% so far this year after a generous 18% return last year, both well above the return of the broad S&P 1500. Nice if you already own utilities, but it doesn't mean you should load up on them now.

Utilities in the S&P 1500 average Quadrix Overall scores of 53, below the average of 59 for the broad index but in line with the sector's long-run average. The sector's fundamentals remain mediocre — as usual. However, in the wake of the recent solid returns, utilities average price/earnings ratios of 21 and Value scores of 55, both unappealing relative to respective averages of 17 and 68 since 1994.

Are we suggesting you shouldn't own utilities? Not at all. At any given time, some sectors will look better than others, and you can probably find some good stocks even in the weakest sectors. However, the utility sector has a history of producing few high Quadrix Overall scorers. At the moment, only two of the 54 utility stocks in the S&P 1500 score above 80 Overall. That lack of fundamental strength keeps utilities off our recommended lists most of the time.

However, we know many subscribers seek utility exposure, either for yield or to diversify their portfolios. For those investors, we devised the Top 15 Utilities portfolio.

Utilities make up less than 4% of the stock-market value of the S&P 1500. For most investors, they should make up less than 15% of the value of a stock portfolio.


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