Utility Stocks Are cheap For A Reason
The average utility stock in the S&P 1500 Index earns a Quadrix Value score of 70, well above the average of 56 for index components and the highest of the index’s 10 sectors. The average utility trades for 14 times trailing earnings, versus the index average P/E ratio of 19.
Based on the numbers mentioned above, utility stocks appear attractively valued. But before you load up on utilities, consider a few more numbers to add some context.
• While consensus estimates project the average S&P 1500 company will grow per-share profits 16% in the next fiscal year, the average utility is expected to deliver just 4% growth.
• The utility sector’s average annual profit-growth estimate for the next five years is 6%, versus 12% for the broader index.
• On average, S&P 1500 utilities earn Quadrix Overall scores of 56, roughly in line with the index average of 58. But only 7% of utilities earn Overall scores above 80, generally our first screen in the stock-selection process.
• So far this year, the S&P 1500 Utility Sector Index has returned 6.9%, versus 9.6% for the broader index. Six of the 10 sector indexes outperformed the utility index.
Given the weak growth expected from most utilities and the dearth of companies with truly excellent fundamentals, our Buy lists do not currently have any exposure to traditional utilities. This week, we are dropping utility/energy hybrid Energen ($45; EGN) from the Long-Term Buy List.
However, utilities average a dividend yield of more than 4%, and that income appeals to many investors.
For income-seeking investors, we recommend the Top 15 Utilities portfolio. Rather than invest a large sum in just one or two traditional utilities, we advise purchasing equal-dollar amounts of the 15 utilities in the nearby table. Since the start of 2009, the Top 15 Utilities portfolio has returned 29.5%, versus 20.5% for the S&P 1500 Utility Sector Index.