The unusual rally in utility stocks has pushed them to record valuation multiples this year. On average, they’re currently trading at 19 times their forward earnings, significantly higher than their historical averages.
Even if utilities are generally an effective hedge and offer stable dividends, current valuation multiple looks exorbitant, considering their earnings growth.
Utilities typically grow their annual earnings by 4%–5%. That’s way lower than the broader-market average. However, utility stocks look expensive compared to the broader markets right now.
Top utility stocks
Some of the big names in the industry—NextEra Energy (NEE), Xcel Energy (XEL), and Sempra Energy (SRE)—are trading beyond 21x of their expected earnings for the next 12 months, much higher than their five-year historical averages.
The utility that’s rallied the most this year, Southern Company (SO), is trading at a forward valuation multiple of 18x. It looks to be trading at a premium against its historical valuation average, around 17x. It’s up more than 28% so far this year.
Not all utilities are expensive
Many top utility stocks (XLU) seem to be trading at a premium valuation. However, some small and mid-sized names look attractive at the moment. Regulated utility PPL Corporation (PPL) stock is trading at 13 times its forward earnings. It looks fairly cheap compared to peers. Also, it’s trading at a dividend yield of 5%, much higher than utilities’ average.
NRG Energy (NRG) stock, which was significantly weak in Q2 2019, is trading ~9.2x its forward earnings. NRG Energy’s higher potential earnings growth makes it an attractive bet in utilities. However, it pays trivial dividends.
AES (AES) also looks alluring, based on its valuation multiple of around 12x. The discounted valuation compared to peers’ average valuation makes it an attractive bet. It also yields 3.3%, in line with peers.
To learn more and compare the top-yielding utility stocks, see Which Utility Stocks Have the Highest Dividend Yields Right Now?