Almost all the top utility stocks have showed a decent rally in the last few months. They are trading more than 17 times their forward earnings, higher than their respective historical average valuation.
Utility giants Southern Company (SO) and Duke Energy (DUK) are trading at 17x and 18x their forward earnings, respectively. NextEra Energy (NEE), the largest component of the Utilities ETF (XLU), is trading 22x its forward earnings, notably higher than its five-year historical average.
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It should be noted that valuation multiples close to 18x and 20x for utilities just don’t seem justifiable because of their lower earnings growth of 4% to 6% per year. Even if their dividend yields pose a significant spread compared to the broader markets and the benchmark Treasury yields, utilities seem to be trading at a premium.
Utility stocks that are trading far below the industry average valuation include PPL (PPL). It is currently trading ~13x its forward earnings, much lower than its historical average. Also, it is one of the top-yielding utilities at 5.2%, higher than utilities’ (XLU) average yield of ~3%.
Merchant power stock NRG Energy (NRG) is trading ~9.2x its forward earnings. NRG Energy’s higher potential earnings growth makes it an attractive bet in utilities. AES is also trading close to 11.8x, notably lower than peers’ average. NRG stock has fallen more than 5% so far this year. AES is up about 12% YTD.