Don’t Overweight The Utilities Sector

Utilities Sector: Don't Overweight Your Portfolio

We’ve all heard Benjamin Franklin’s quip that nothing in the world is certain but death and taxes.

However, for a number of years now, income investors have relied upon a third certainty: utilities. Indeed, many portfolios were buoyed by the steady, above-average dividend payments offered by utilities stocks.

Unfortunately, the run-up in the market, combined with the perpetual search for yield, has elevated the prices of utilities stocks to the point that they provide a mediocre yield and a substantial chance of capital loss.

Thus, while a few investible companies remain, investors should tread carefully in this once-sought-after income haven.

Bull Market Pressures

In total, these forces have pushed the premium above the net asset value at which utilities stocks trade. This has been particularly true during the current bull market, in which utilities have been seen as safe havens for dividend seekers – even though the dividend yields available have steadily decreased and the price risks have risen.

You can see the effect of the current bull market by looking at Pepco Holdings, Inc. (POM), the electric utility for the Washington, D.C. area. In mid-2009, it was trading at $14, and its stock price was less than net asset value. Its dividend yield, based on a $0.27 quarterly dividend, was 7.7%. At that level, it represented a safe, attractive investment for income investors.

Today, POM pays the same $0.27 quarterly dividend, but its stock price has almost doubled to $27. At that level, it yields a bare 4% and is trading at 60% above net asset value. What’s more, its trailing four quarters earnings were just $0.96, so the dividend is uncovered, and the stock is trading at a trailing P/E ratio of 29x.

And while there appears to be little chance of a significant dividend increase in the near future, there’s a substantial chance that the stock will soon trade closer to its net asset value of about $17 per share. That’s not an attractive investment.

1 2
View single page >> |

Recommendations are subject to change at any time. Wall Street Daily, LLC expressly forbids each of its writers from having a financial interest in any security the writer recommends to his ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.