Considering that soaring crude oil prices
are likely to put a damper on the economy, some would argue that the
market has gotten ahead of itself lately and is due for a correction.
If you agree, it’s time to consider
utility stocks. Sure, utilities are boring. Since you’re not going to
find the next Google in the group, owning utilities doesn’t give you
much to talk about in the locker room.
A Lot to Like
But there’s a lot to like about utilities. For starters,
utilities typically enjoy monopolies in their market area. They don’t
have to worry about losing customers to some new website or
technological gadget. An economic slowdown might temporarily cut
demand for electricity or natural gas. But, long-term, utilities
typically grow revenues and earnings in the mid-single digit range,
annually. Utilities in faster growing regions do better, and those in
regions with struggling economies do worse. While utility share prices
might drop with the market during a downturn, they usually recover
when the market revives.
All About Dividends
All that said, for most
investors, dividends are the main attraction for utilities. Dividends
are regular cash payouts that you receive for simply owning a stock.
While you’re lucky to get 1% from a bank
these days, many utilities are paying dividends equating to
4% or higher yields (your dividend yield is
the dividends that you receive over the next 12-months divided by the
price that you paid for the shares).
When the market dips, you’ll still
receive your dividends while you wait for the market to recover. That
only works, of course, if your stock continues to pay its dividends as
expected, and that’s the advantage of owning utilities. Because they
produce steady and predictable cash flows, dividend cuts are rare.
February 2010
Screen
How have utilities performed in the recent strong market? Last
year, in February, I told you about four utilities that were turned up
by a stock screen that I described in the February 14, 2010
column. Those four utilities averaged a 17% return (price appreciation
plus dividends received) from then through April 6, 2011, about
2% less than the overall market, at least as
gauged by the S&P 500. That’s not bad for a conservative portfolio in
a hot market.
New List
Last week, I reran the screen, with a couple of modifications,
and it also listed four utilities, three of them the same as last
year’s picks.
In both instances, I used Morningstar’s
free (registration required) and easy to use
stock screener to pick the utilities. I’ll give you the list in a
minute, but first, I’ll show you how to set up the screen so you can
run your own search. If you’re not familiar with the term, a stock
screener is a program that you can use to search out stocks meeting
your specific requirements. Here’s how to use Morningstar’s screener
to find the utilities.
Find the screener from Morningstar’s
homepage (www.morningstar.com)
by selecting Stocks, and then
Stock Screener in the Tools section.
Screen Filters
Start by selecting Utilities from the Stock Sector dropdown
menu. Then, specify $1 billion for minimum market capitalization
(value of all shares out) to rule out smaller utilities, which tend to
be riskier than larger firms.
Next, we’ll use Morningstar’s
profitability and financial health stock grading features to pick
high-rated utilities in those categories. Morningstar grades stocks
from A to F, where A is best. Check the A, B, and C boxes for
Profitability Grade, and the A and B boxes for Financial Health. These
selections require passing utilities to be average or better in terms
of profitability, but with above average financial health.
To be on the safe side, I also checked
return on equity, a standard profitability gauge that can be applied
to stocks in any industry. It compares the last 12-month’s earnings to
shareholders equity (book value). Many money managers won’t consider
stocks with ROEs below 15% and that’s the value I specified for this
screen.
Finally, I selected a minimum
4% dividend yield. That’s it. Select Show
Results to see the list of passing stocks.
Results
My screen listed these four utilities:
•
Dominion Resources (D), which is paying a
4.1% expected dividend yield,
•
DPL Incorporated (DPL), 4.4% yield,
•
Exelon (EXC), 5.1%, and
•
Public Service Enterprise (PEG), 4.3%.
Since expected yields move inversely to
share prices, you may see different values when you run the screen. If
your screen lists more than five or six utilities, click on the
Dividend Yield column label to sort the list with the highest yielding
utilities at the top. All else equal, go for the highest payers.
As always, consider the
screen results to be research candidates, not a buy list. The more you
know about your stocks, the better your results.
published 4/10/11
