Utility Stocks Aren’t Getting Much Respect From the Market — but They Have Big Dividends

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Duke Energy shares returned astir 16% done Sept. 7. Here, Duke transmission towers and powerfulness lines successful Edwardsport, Ind.

Courtesy of Duke Energy

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Utility stocks, traditionally a haven for income investors, haven’t been getting overmuch respect comparative to different sectors. But there’s inactive plentifulness of output available.

The Utilities Select Sector SPDR money (ticker: XLU), a proxy for large-cap U.S. inferior stocks, returned 11% this twelvemonth done Sept. 7, trailing the S&P 500’s 21.5%, dividends included. The money besides trails the S&P 500 implicit one-, two-, three-, and five-year periods. And among the 11 sectors successful the S&P 500, the utilities assemblage is the second-worst performer implicit the past twelvemonth with a instrumentality of 17.75% and up of lone user staples.

These returns are hardly disastrous, but they exemplify however the marketplace has gravitated to different sectors specified arsenic financials, which person returned astir 50% implicit the past year, and adjacent energy, up 37%.

Still, inferior yields stay attractive, and the sector’s dividends person been durable passim the pandemic with minimal cuts oregon suspensions.

“On a risk-adjusted basis, utilities are successful a beauteous bully place,” says John Bartlett, president of Reaves Asset Management, which specializes successful utilities and infrastructure holdings.

Company / TickerRecent PriceDividend YieldMarket Value (bil)YTD Return
Edison International / EIX$58.634.5%$22.3-4.5%
Consolidated Edison / ED74.884.026.56.9
Duke Energy / DUK103.203.779.416.1
NiSource / NI24.723.59.710.7
Entergy / ETR112.503.322.615.8

Prices and returns arsenic Sept.7; different information arsenic of Sept. 8

Source: FactSet

He points retired that the 10-year U.S. Treasury enactment was precocious yielding nether 1.4%, acold beneath those of astir inferior stocks. “Utilities are good here,” Bartlett says. “We don’t commencement to get disquieted astir inferior valuations until we get meaningfully higher levels of involvement [rates].”

The Utilities Select Sector SPDR money precocious traded astatine astir 20 times 2022 nett estimates, supra its five-year mean of 17.7 times, according to FactSet. However, it trades astatine a discount to the market’s 2022 P/E of 20.8 times.

Bartlett says utilities “are besides comparatively inexpensive connected a output basis.” The median output connected the inferior stocks helium covers is astir 3.25%, helium says, “and the dispersed betwixt that and the U.S. Treasury astatine [1.34% recently] is beauteous attractive.”

Barron’s precocious ran a surface that started with the highest-yielding inferior stocks successful the S&P 500.

We’re wary of chasing yield, however. “It’s ever a unsafe crippled taking the highest yielders successful a sector,” says Bartlett. “Those things usually person higher yields for a circumstantial reason.”

So to defender against worth traps, we past looked for utilities that raised their dividends successful 2020 versus 2019 levels and are expected to summation their payouts this twelvemonth arsenic well, based connected FactSet estimates.

The 5 companies successful the surface are Edison International (EIX), which precocious yielded 4.5%; Consolidated Edison (ED), 4.1%; Duke Energy (DUK), 3.8%; NiSource (NI), 3.5%; and Entergy (ETR), 3.4%.

Of the 5 stocks successful our screen, Edison International, based successful Southern California, is the lone 1 that’s down this year, successful that lawsuit minus 4.5%.

Bartlett, however, calls the electrical inferior “a perfectly worthy story”—though a shorter-term interest is the California occurrence season. He likes the company’s semipermanent prospects, however, and expects the dividend to proceed to grow.

Consolidated Edison, based successful New York City, faces a challenging regulatory setting, helium says, and doesn’t person the maturation that immoderate utilities do. But Bartlett believes the dividend looks safe.

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As for Duke Energy, helium says, “there’s truly thing incorrect with Duke.” Through Sept. 7, the Charlotte, N.C.–based utility’s banal had returned astir 16%, astir the aforesaid arsenic Entergy’s performance.

NiSource, based successful Indiana, has returned astir 11% this year. It’s a afloat regulated inferior with astir 3.2 cardinal natural-gas customers and 500,000 electrical customers crossed six states.

Entergy, based successful New Orleans, took a large deed from Hurricane Ida, which knocked retired powerfulness successful overmuch of that region. But the banal has held comparatively steady, having gained 0.7% since Aug. 27—compared with astir 0.1% for the Utilities Select Sector SPDR. Besides Louisiana, the company’s footprint covers Mississippi, Arkansas, and Texas. The banal “has fixed a small backmost due to the fact that of the hurricane,” says Bartlett, who maintains that the company’s dividend is safe.

Concerns aside, these utilities fig to present dividends that should creaseless retired ups and downs.

Write to Lawrence C. Strauss astatine lawrence.strauss@barrons.com

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