Making Sense Of Utilities

8/10/2010


Considering that the 73 utility stocks in the S&P 1500 Index combine to represent just 4% of the index’s market value, they certainly occupy a big place in the hearts of investors.

The sector as a whole looks moderately attractive, with S&P 1500 utilities averaging Quadrix® Overall scores of 57 and Value scores of 69. Which parts of the sector offer the most investment potential depends on your perspective.

Within the utility sector, electric utilities and independent power suppliers are the cheapest and offer the best long-term profit potential. The two groups also earn the strongest Quadrix scores, though neither is particularly impressive. Only eight, or 11%, of the index’s utility stocks earn Overall scores above 80. Historically, the sector’s modest growth and high debt levels have made it difficult for traditional utilities to manage exceptionally high Overall scores.

On the other hand, the S&P 1500 Index’s diversified and natural-gas utilities have outperformed the rest of the sector by a wide margin over the last 12 months and five years. Despite that stock-price momentum, neither group looks expensive. On average, both groups trade at slightly lower P/E ratios than the five-year average for stocks in their groups.

With few individual utilities representing obvious buy opportunities, we offer subscribers two options.

First, if you just want one utility stock, go with Energen ($45; EGN), which operates both a natural-gas utility and an energy-production business. Energen, a Long-Term Buy, is the only utility on our buy lists.

Second, if you’re concerned about income and would rather own traditional utilities, spread your bets with our Top 15 Utilities portfolio, designed to pay a yield comparable to that of the average utility but provide superior growth potential. For a look at the portfolio, click here, or visit www.DowTheory.com/Go/Top15.

UTILITY SECTOR ANALYSIS
Total
Market
Capitalization
($Billions)
Avg.
Div.
Yield
(%)
– Average P/E Ratio –
Avg. Estimated
—– EPS Growth –—
Average
– Quadrix Scores –
Avg. Sector-
– Specific Scores * –
Utility Sector Groups
(No. Of Cos.)
% Of
Sector
Trailing
5-Year
Average
Current
Year
(%)
Next 5
Years
(Ann.)
(%)
Value
Overall
12-Factor
Sector
Reranked
Overall
Electric (27)
220.2
49
5.5
14
17
10
6
73
61
63
62
Diversified (24)
165.4
37
4.5
14
16
5
5
70
58
47
59
Independent Pwr. (4)
20.3
4
0.8
8
20
(20)
7
86
68
77
67
Natural Gas (16)
42.3
9
3.5
15
16
(1)
6
61
46
35
35
Water (2)
3.4
1
2.9
22
27
20
5
45
54
72
40
S&P 1500 Util. (73)
451.6
100
4.4
14
17
5
6
69
57
53
55
* Percentile ranks, with 100 the best. Sector-specific scores rank stocks versus other stocks in the same sector.

 


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