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XLU: How Utility Stocks Look from the Valuation Standpoint

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Utility stocks look expensive

Many utility stocks are trading way higher than their historical average valuation multiples. NextEra Energy (NEE) stock is trading 22x its forward earnings, which is above its five-year average PE ratio. American Electric Power (AEP) is trading at a forward PE ratio of 20x, which is higher than its historical average.

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These stocks’ valuations look inflated when it comes to their earnings growth. Utilities (XLU) are expected to grow 4%–6% annually for the next few years. A valuation multiple of over 20x for dull earnings growth, despite a premium yield, doesn’t look justifiable.

NRG Energy (NRG) is trading at 11x its forward earnings. NRG Energy was one of the utility stocks with the top gains last year. While the company pays petty dividends, NRG Energy’s higher likely earnings growth makes it an attractive play in utilities.

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AES (AES), another smaller component of the Utilities ETF (XLU), is trading at a forward PE ratio of 13.0x based on its estimated EPS. In comparison, utilities’ average forward PE ratio is over 17x–18x. AES’s historical average PE ratio is also above the current multiple. AES appears to be trading at a discounted valuation compared to its peers.

PPL (PPL) is trading at 13x its forward earnings, which is lower than its historical average. PPL is one of the top-yielding utilities at 5.2%, which is notably higher than utilities’ average yield of 3%.

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