Top 15 Utilities Beat Benchmark
Not surprisingly, utility stocks have lagged the broader market since the March low.
Utilities, which tend to have higher dividend yields and lower profit growth than the average stock, are perceived as conservative and tend to underperform during upward market moves. However, utilities have outperformed over the last two-and-a-half years. Since the start of 2007, the S&P 1500 Utilities Index is down 20%, versus 28% for the broader S&P 1500 Index.
Forecasts readers can do better than just buying the utility index. Our Top 15 Utilities portfolio, initiated in early 2007, contains a diversified selection of utilities designed to offer superior growth potential, coupled with a yield comparable to that of utility indexes. Since 2007, the Top 15 Utilities portfolio is down 14%, more than six percentage points better than the S&P 1500 Utility Sector Index. Returns exclude dividends and transaction costs. A portfolio containing equal-dollar amounts of all 15 stocks yields 4.0%, while the utility index yields 4.5%.
We recommend two energy/utility hybrids, Energen ($41; EGN) and Questar ($34; STR), as Long-Term Buys. They have lower yields than most utilities and have much higher growth potential because of their energy-production operations. But for now, no traditional utilities are recommended as Buys or Long-Term Buys. For investors who wish to own traditional utilities, we advise seeking safety in numbers: Spread your bets around the sector with the Top 15 Utilities portfolio.
This week, we are making a change. MDU Resources ($21; MDU) is out, and Public Service Enterprise Group ($32; PEG) is in.
MDU generates less than one-fifth of revenue from regulated utilities, and its construction-related businesses have performed poorly in recent quarters. The shares are down 34% over the last year but still don’t look particularly cheap. Moreover, the company now expects energy production to fall at least 7% this year.
Public Service Enterprise Group earns a Quadrix® Overall score of 74, high for a utility, and at least 70 in both utility-specific sector scores. Results have held up well during the recession, with sales up in five of the last six quarters. Wall Street expects per-share profits to rise 6% this year, while the 3% growth target for 2010 seems conservative.