Utility Returns Don't Tell Whole Story

3/28/2011


Over the last five years, utility stocks have outperformed the broader market, with the S&P 500 Utility Sector Index generating a total return of 17.5%, versus 12.3% for the S&P 500 itself. However, utilities have lagged over the last 19-plus years. Since the start of 1992, the utility sector index has returned 199%, versus 355% for the broader index.

During the 12 years from 1992 through 2003, the S&P 500 outperformed its utility sector 11 times. Utilities then outperformed for five straight years.

Utilities tend to lag when the broader market does well. The S&P 500 returned at least 10% in 11 of the last 19 years, and utilities outperformed in just two of those 11 years. But when the broader market declined or managed just modest gains, utilities outperformed half of the time.

For now, the utility sector seems attractively valued. The sector index trades at 12 times trailing earnings, a 32% discount to the broader index, versus the average discount of 24% since the end of 1993.

Despite utilities’ valuation and five-year outperformance, we do not expect similar superiority over the next five. Still, utilities may appeal to risk-averse, income-oriented investors. We advise investors seeking utility exposure to purchase equal-dollar amounts of the Top 15 Utilities portfolio, listed below.

TOP 15 UTILITIES
Company (Price; Ticker)
Div.
($)
Yield
(%)
AGL Resources ($39; AGL)
1.80
4.6
Avista ($23; AVA)
1.10
4.9
Cleco ($33; CNL)
1.00
3.0
DPL ($27; DPL)
1.33
5.0
DTE Energy ($48; DTE)
2.24
4.7
Energen ($62; EGN)
0.54
0.9
Entergy ($67; ETR)
3.32
5.0
Exelon ($41; EXC)
2.10
5.1
NextEra Energy ($54; NEE)
2.20
4.1
PPL ($24; PPL)
1.40
5.7
Public Svc. Ent. ($31; PEG)
1.37
4.4
Southern Union ($28; SUG)
0.60
2.1
TECO Energy ($18; TE)
0.82
4.5
UniSource Energy ($36; UNS)
1.68
4.7
Westar Energy ($26; WR)
1.28
4.9

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