Our Top Utilities Outperform

5/10/2010


Who says utility investors can’t have both growth and income?

It’s a mistake to assume all utilities are slow and stodgy. Our Top 15 Utilities portfolio has demonstrated this truth by selecting a fairly diversified group of the best utility stocks and outperforming the S&P 1500 Utility Sector Index by 15 percentage points since its initiation around year-end 2006. Since the start of 2009, the portfolio has delivered a total return of 24.6%, versus 12.2% for the sector index.

TOTAL RETURNS
* Returns as of
May 4
.
Top 15
Utilities
(%)
S&P 1500
Utility
Sector
(%)
2007
11.9
16.6
2008
(20.5)
(26.7)
2009
20.3
12.8
2010 *
3.5
(0.6)
2007-Present *
10.8
(4.2)
2009-Present *
24.6
12.2

Dividends account for much of the Top 15 portfolio’s return. Dividends, and the reinvestment of those dividends, have boosted returns by more than six percentage points since the start of 2009 and 12 percentage points since the start of 2007.

Our portfolio outperformed in part because we included energy/utility hybrids that don’t pay particularly high yields, but boast far better growth potential than the typical utility.

TOP 15 UTILITIES PORTFOLIO
5-Yr. Annual
— Growth —
Quadrix Sector
—– Scores * –—
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
EPS
(%)
Div.
(%)
Quadrix
Overall
Score *
12-
Factor
Sector
Re-
Ranked
Overall
AGL Resources
($39; AGL)
1.76
4.5
57
5
8
67
57
80
Avista
($22; AVA)
1.00
4.6
63
14
9
70
70
86
DPL ($28; DPL)
1.21
4.4
61
16
4
67
80
75
DTE Energy
($48; DTE)
2.12
4.4
59
10
1
80
60
88
Energen
($48; EGN)
0.52
1.1
14
17
6
80
89
94
Entergy
($80; ETR)
3.32
4.2
49
11
9
67
93
77
Exelon
($43; EXC)
2.10
4.9
54
8
9
69
94
75
FPL Group
($51; FPL)
2.00
3.9
49
12
7
71
92
78
IDACORP
($36; IDA)
1.20
3.4
46
7
0
76
84
96
OGE Energy
($41; OGE)
1.45
3.5
55
10
1
53
27
53
Oneok
($50; OKE)
1.76
3.5
56
9
12
76
37
90
Pub. Svc. Ent.
($32; PEG)
1.37
4.3
44
16
4
73
98
89
Sempra Energy
($49; SRE)
1.56
3.2
39
2
9
52
64
42
UGI ($27; UGI)
1.00
3.7
43
6
5
57
53
60
UniSource Energy
($33; UNS)
1.56
4.7
60
18
13
87
88
94
Top 15 Portfolio
Average
3.9
50
11
7
70
72
78
S&P 1500 Utility
Sector Avg.
4.4
64
5
4
57
53
54
* 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.

Few traditional utilities have the operating momentum we require for inclusion on our buy lists. And few of the utility hybrids that meet our standards will offer the type of yield that typical utility investors seek. Hence, the Top 15 Utilities portfolio.

While our portfolio’s yield tends to lag that of the utility index slightly, it has more than made up for that deficiency in superior capital gains. To mimic our Top 15 portfolio, purchase equal-dollar amounts of the 15 utility stocks in the table below. This strategy is designed to deliver a yield close to the industry average — with substantially higher capital gains.

Last week, we dropped Questar ($48; STR) from the portfolio after it rallied on news it was considering a spin-off of its oil and gas unit. Our downgrade cited declining Quadrix scores, questionable operating momentum, and an unappealing valuation. The stock now earns a B in our Utility Update. This week, we’re adding DTE Energy ($48; DTE) to the portfolio.

DTE provides electricity to 2.2 million customers and natural gas to 1.2 million customers in Detroit and the surrounding region. Economic weakness has weighed on DTE’s revenue, but per-share profits rose 19% in 2009 and 15% in the March quarter, and last month DTE raised its profit guidance for 2010.

The company’s nonregulated energy and power businesses offer decent growth potential, and a January rate increase bespeaks a friendlier regulatory environment that could help profits at the utility. DTE is being added to the Top 15 Utility Portfolio and raised to an A rating in the Utility Update.


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