Alan Brochstein takes a closer look at utility stocks

At a time when everyone seems focused on yield, one sector I think makes sense is Utilities. The sector has lagged the market this year, increasing in value only 9.6%.  It marginally outperformed the market last year, falling “only” 31.4%.

The bull case for the group is that interest rates are and will remain low due to the weak economy, while these highly regulated companies should continue to enjoy good access to capital. Additionally, some utilities have suffered due to lower industrial demand that should come back over time.

The bear case would focus on some regulatory risk at the national level (particularly cap-and-trade). I don’t own any of these stocks in my model portfolios, but I have been considering them.

One of my clients always owns some utilities in balanced accounts, and they think the sector is attractive. Two other clients have approached me this month, neither of which traditionally cares about this sector that represents just 4% of the S&P 500.  So I’m noticing a trend, especially since I noted several weeks ago that the dividend yields seem quite high. These stocks tend to perform best in flat or declining markets and when rates are stable or falling. In the past 4 weeks, the group has done better than the market by about 7%.

I decided to screen the universe of utility stocks in the broader market (the Russell 3000). Starting with 95 candidates, I ended with 10 deserving closer scrutiny. Here’s my initial screening criteria:

•    Yield > 4%
•    Net Debt to Capital < 50%
•    # of consecutive dividend hikes in past 10 years > 2

The goal was to find higher-yielding companies without excessive leverage that have been raising their dividends in a tough time. Here are the 10 stocks that made that cut:


 
See a larger version of this chart.

One thing that’s exciting to me about the initial cut is that it included several unknown names - maybe some interesting discoveries here. Portland General (POR) was the utility that Enron bought – it sure looks cheap to me. Its stock was distributed in bankruptcy, so there has been a lot of selling pressure since it came out in 2006.

As I said, this isn’t an area of real focus historically for me, so I will need to do some work before I can confidently recommend any of these. Some of the key factors are the local regulatory environment, the sources of fuel, the quality of management and the potential for population growth in the area.
I encourage you to explore this sector and look forward to hearing your observations.

Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Alan holds no positions in the stocks mentioned above.

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