Bargains among beaten-up utilities abound. When measured on a relative price-to-earnings valuation basis against the S&P 500, utility stocks are cheaper than they’ve been since 2009. And despite an uptick in the Santa Claus rally, as of late December, XLU was still down about 10% for the year.
Given their performance history, many utilities’ returns may not grow more than 6 or 7% annually over the next couple years. But typical dividend levels could easily put total returns in the low double digits—not bad for an equity safe haven and superior to yields of Treasuries and investment grade bonds.
Pessimistic clients still fearing a hard landing, despite mounting contrary indications, might take comfort in the sector’s long history of economic resilience, especially during a prolonged interest-rate plateau following a rate-hiking cycle that produced a slowing economy, like the current one.
Relatively Low-Risk Standouts
Our sector screens for a wide range of fundamentals metrics yielded more than a dozen names with the lowest measurable downside risk.
Of this elite group, six stand out for their advantageous combinations of dividend yields, P/Es and ROE, relative to their low-risk peers, as shown by metrics as of mid- to late December:
Eversource Energy (ES). Market cap: $20.84 billion. With one of the best dividend yields of the low-risk roster, 4.36%, this gas company has a trailing 12-month P/E of 17.8 and ROE of 7.55%.
Entergy Corp. (ETR). Market cap: $21.57 billion. This electric company has a trailing P/E of 14.7, a dividend yield of 4.48% and ROE of 11.16%.
American Electric Power (AEP). Market cap, $41.9 billion; dividend yield, 4.34%; ROE, 9.44%; trailing P/E, 24.6.
Consolidated Edison (ED), AKA Con Ed, a multi-utility. Market cap, $31.6 billion; trailing P/E, 13.51; dividend yield, 3.58%; ROE, 11.48%.
Edison International (EIX). Market cap: $25.9 billion. Not to be confused with Con Edison, this electric company has a dividend yield of 4.38%. Trailing P/E, 21; ROE, 8.58%.
Unitil (UTL), a holding company engaged in electricity and natural gas distribution, with a market cap of $824 million. Trailing P/E, 8.52; dividend yield, 3.05%; ROE, 9.45%.
Client portfolios long on sex appeal and short on stability can probably benefit from utilities’ portfolio-risk protection. These key defensive stocks can generally provide clients with figurative as well as literal warmth when growth stocks turn cold. And they’re all the warmer for their reliable income.
Dave Sheaff Gilreath, CFP, is a founding principal and CIO of Innovative Portfolios, an institutional money management firm, and Sheaff Brock Investment Advisors, serving individual investors. Based in Indianapolis, the firms manage assets of about $1.3 billion. Investments mentioned in the article may be held by those firms, Innovative Portfolios’ ETFs, affiliates or related persons.