Utilities: Not a boring sector
Utilities, popularly called “widow-and-orphan” stocks, have been strong over the past 12 months. Many utility stocks are trading at multiyear highs. As a sector, utilities look relatively overvalued compared to the historical average valuation. Some of the biggest stocks in the sector including NextEra Energy (NEE), American Electric Power (AEP), and Southern Company (SO) appear to be trading at a significant premium.
The safe-haven utilities have already beat investors’ expectations. They could show signs of slowing in the short term. Safe-haven utilities’ relatively slower earnings growth and premium valuations could be an obstacle going forward.
On average, utility stocks offer a yield of 3%, which is higher than broader markets and the benchmark ten-year Treasury yield. Apart from the yield, utilities offer fair dividend growth as well. The dividends are expected to increase 4%–6% per year for the next few years. Many utility stocks (IDU) that offer a premium yield that’s higher than the average. Southern Company (SO) yields 4.6%, while PPL (PPL) yields 5.1%.
Utilities have been an effective hedge against market uncertainty. They have also beaten broader markets in the longer term. Broader utilities returned more than 70%, while SPY returned 65% in the last five years. NextEra Energy (NEE) returned more than 135% during the same period.