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Not All Utility Stocks Are Trading at a Premium

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Valuation

Utility stocks as a whole are trading at a forward PE multiple of ~18x, higher than their historical average. The unusual rally in these defensives has taken them to all-time highs.

Top utility stocks NextEra Energy (NEE), American Electric Power (AEP), and Duke Energy (DUK) are trading higher than 21x their forward earnings, far above their respective historical averages.

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These stocks’ valuations look exorbitant when it comes to earnings growth. Utilities are expected to grow 4%–6% annually for the next few years. A valuation multiple of over 20x for such dull earnings growth seems unjustifiable.

Even if we consider their premium yields and dividend growths, many utility stocks look to be trading at significant premiums.

Some good bargains

Not all utility stocks look expensive at the moment. PPL Corporation (PPL) stock is trading lower than 13x its earnings for the next 12 months, far lower than its peers. Although PPL expects its earnings growth to be in line with the industry average, its premium yield of 5.1% makes it attractive. It offers a yield spread of 200–250 basis points compared to utilities’ average and the average of the ten-year Treasury yield. PPL stock has surged more than 15% in the past year, largely tracking utilities as a whole.

FirstEnergy (FE) is trading at a forward PE of 16x, lower than utilities’ average. FirstEnergy’s improved business mix given the separation of its competitive segment last year will likely bode well for its earnings growth in the long term. Edison International (EIX) stock is trading at 13.6x its forward earnings, far lower than the peer average.

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