Utilities beat the S&P 500
Utility stocks have not been just an effective hedge lately, but have outperformed broader markets. Over the past year, utility stocks have gained 14% on average, while the S&P 500 has gained 9%. Many top utility stocks are trading at a substantial premium to their historical averages.
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NextEra Energy (NEE), the biggest constituent of the Utilities Select Sector SPDR ETF (XLU), has a forward PE multiple of 22x, higher than its five-year average. Dominion Energy’s (D) and Duke Energy’s (DUK) multiples are 18x, in line with the industry average, and Southern Company’s (SO) is below 17x, the lowest among top utilities.
American Electric Power’s (AEP) and Xcel Energy’s (XEL) forward PE multiples of 20x are higher than peers’ average as well as their own historical averages. Their valuation may be inflated because of their subdued earnings growth. The utilities’ usual EPS growth of 4%–6% annually may not support their current valuation. However, considering their stable dividend yields and growth, these utility stocks seem to be trading at a premium. Safe-haven utilities’ slower earnings growth and premium valuation could hinder any rallies going forward.