Will Utilities Stay Strong?

3/29/2010


Over the last three, five, and 10 years, utility stocks have outperformed the broad market.

Does that mean that utilities have suddenly begun generating outsized profit growth, or that they are likely to pace the market over the next decade?

Not exactly. Utilities’ profits are less sensitive to the economy than those of most companies, and such defensive stocks tend to hold up better than most during economic downturns. Since 2007, the S&P 1500 Utility Sector Index delivered a negative total return of 5.7%, versus a negative return of 9.8% for the broader index.

On average, utility stocks look better now than they have over most of the last five years. Historically, our Quadrix® rating system has not favored utilities, with scores dragged down by weak growth and high debt levels.

But, as the table below illustrates, the average utility stock in the S&P 1500 Index earns a Quadrix Overall score of 58 and a Value score of 80. The average utility trades at 15 times trailing earnings and at a discount of 8% to its five-year median P/E ratio.

UTILITY SECTOR CHANGES OVER TIMES
On average, S&P 1500 Index utility stocks earn higher Overall and Value scores today than they have over most of the last five years. With decent profit-growth expectations and attractive valuations relative to their history, the sector as a whole looks fairly appealing.
— Quadrix Scores * —
12-Month
— Growth —
– P/E Ratio –
Total
— Return —
Div.
Yield
(%)
Div.
Payout
Ratio
(%)
Value
Perfor-
mance
Overall
Sales
(%)
EPS
(%)
Trail.
Trail.
Over
5-Yr.
Med.
1
Yr.
(%)
3
Yrs.
(Ann.)
(%)
Today
4.2
61
80
33
58
(11)
(4)
15
0.92
33
(1)
6 Mos. Ago
4.4
60
80
37
65
0
1
14
0.85
(13)
(2)
1 Yr. Ago
5.2
58
55
67
56
9
3
12
0.70
(23)
(6)
2 Yrs. Ago
3.7
58
65
56
50
4
3
17
0.91
(5)
9
3 Yrs. Ago
3.1
56
68
57
49
7
19
18
1.12
21
17
4 Yrs. Ago
3.5
58
74
43
51
13
15
18
1.22
14
25
5 Yrs. Ago
3.4
60
73
57
49
5
8
18
1.25
17
11
5-Yr. Avg.
3.7
58
68
55
53
6
6
17
1.12
7
10
* Quadrix scores are percentile ranks, with 100 the best.

While the utility sector enjoys stronger fundamentals than was common in the past, investors should remember that they are still utilities, labeled as defensive for good reason. If the market trends higher over the next five years, history suggests utility stocks will lag. From December 1991 through Feb. 26, the broad Dow Jones U.S. Index delivered an annualized return of 7.8%, versus 6.5% for the utility sector index.

No, utilities are not likely to pace the market, particularly if it rises in coming years. But as long as investors do not expect outsize returns, utility stocks offer some benefits.

Yield: The average S&P 1500 Index utility yields 4.2%, versus 1.3% for the average stock in the index. Income-oriented investors tend to like utilities, although they should not make up more than 15% to 20% of a portfolio.

Low volatility: Among stocks in our universe with 10 years of history, the median utility is less than half as volatile as the median stock, as measured by standard deviation. Standard deviation reflects how widely monthly returns deviate from the average return.

Diversification: The utility sector index has a lower correlation with the broader index than any sector index other than consumer staples.

If utilities appeal to you, we have a suggestion. Check out our Top 15 Utilities portfolio, presented in the table below. This week, we made two changes to the portfolio.

The Top 15 portfolio is designed to provide a yield comparable to that of the average utility along with substantially higher growth potential. Excluding dividends, the Top 15 portfolio has outperformed the S&P 1500 Utility Sector Index by more than 12 percentage points since its inception in 2007.

TOP 15 UTILITIES PORTFOLIO
—— Quadrix Scores * ——
– P/E Ratio –
Company
(Price; Ticker)
Div.
Yield
(%)
Overall
12-Factor
Sector
Reranked
Overall
Trail.
5-Yr.
Avg.
Industry
AGL Resources
($38; AGL)
4.6
66
59
72
13
0.98
Gas
Avista
($21; AVA)
4.7
68
74
87
13
0.74
Diversified
DPL ($28; DPL)
4.4
70
78
76
14
0.80
Electric
Energen
($47; EGN)
1.1
76
90
93
13
0.99
Hybrids
Entergy
($80; ETR)
3.7
76
96
90
12
0.75
Electric
Exelon
($44; EXC)
4.7
71
93
80
10
0.61
Diversified
FPL Group
($48; FPL)
4.2
63
87
59
12
0.73
Electric
IDACORP
($35; IDA)
3.4
86
85
99
13
0.90
Electric
OGE Energy
($39; OGE)
3.7
64
44
74
15
1.04
Diversified
Oneok
($46; OKE)
3.8
75
32
91
16
1.24
Diversified
Public Svc. Ent.
($31; PEG)
4.5
75
91
89
10
0.60
Diversified
Questar
($43; STR)
1.2
73
77
78
19
1.11
Hybrids
Sempra Energy
($50; SRE)
3.1
56
82
48
10
0.84
Diversified
UGI ($26; UGI)
3.0
64
32
77
11
0.87
Diversified
UniSource Energy
($32; UNS)
4.8
78
88
95
11
0.47
Electric
Portfolio Average
3.7
71
74
80
13
0.85
* Quadrix scores are percentile ranks, with 100 the best. The 12-Factor Sector and Reranked Overall scores are designed to rank utility stocks relative to other utilities.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com