Top 15 Utilities trounce index

5/12/2008


Our utilities strategy is more than holding its own.

In recent years, the Forecasts has recommended that investors who wish to own utility stocks spread their money around several companies, rather than focusing on just two or three. Utilities’ operations are riskier than they once were, and strong performance in recent years aside, utility stocks are likely to be more volatile than in years past.

For the most part, traditional utilities do not offer the growth potential we seek. As such, we hold none of these stocks in our Buy List or Long-Term Buy List. However, we realize that the solid yields paid by utility stocks appeal to many investors. That’s why we created the Top 15 Utilities portfolio, a strategy that helps income-oriented investors tap into the utility sector, providing capital-gains potential above that of the average utility without sacrificing yield. Our diversified group of utility stocks should continue to deliver decent profit growth, which in turn should drive stock-price growth.

So far this year, our Top 15 Utilities portfolio has declined 0.2%, versus a 4.7% decline for the S&P 1500 Utilities Sector Index. The Top 15 portfolio yields 3.3%, and investors who followed our strategy of purchasing equal-dollar amounts of the 15 utilities should have a positive total return this year.

Credit our outperformance this year in part to energy. Long-Term Buys Energen ($68; NYSE: EGN) and Questar ($65; NYSE: STR) have managed price gains of more than 6% so far this year.

The Top 15 Utilities portfolio lagged in 2007, mostly because of weakness in two stocks we held too long. This year, we will be quicker to get out of problem stocks. With that in mind, we are making a change to the Top 15 Utilities portfolio.

MGE Energy ($36; NASDAQ: MGEE) isn’t a stinker, though its Quadrix® scores have declined. The shares are up slightly this year, and the company should continue to benefit from strong population growth in its service area. But MGE has delivered choppy results in recent quarters, and there is no obvious catalyst for outperformance over the next year.

As an upgrade from MGE, subscribers should purchase DPL ($28; NYSE: DPL), a traditional electric utility serving more than 515,000 customers in Ohio. DPL delivered strong March-quarter profits of $0.66 share, up 53%, and raised its 2008 profit guidance. Sales have risen at least 7% in each of the last three years, a trend likely to continue at for at least two more years. Consensus estimates project per-share-profit growth of 35% this year and 10% in 2009.

A heavy debt load weighs on DPL shares, and the stock trades at less than 14 times projected 2008 earnings. However, DPL generates more than enough income to cover its debt service and support dividend growth. DPL, yielding 3.9%, is being added to the Top 15 Utilities portfolio and upgraded to an A rating in our Utility Update, a review of more than 80 utility stocks that will next publish in the June 30 issue of the Forecasts. MGE retains its A rating, but is being dropped from the Top 15 portfolio.


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