The One Utility to Buy

07/18/2014 9:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

The S&P 500 Utility Sector Index has returned 16.4% in 2014, tops among the ten market sectors and more than twice the broader index's 6.4% return, observes Richard Moroney, editor of Dow Theory Forecasts.

When a sector known for stodgy, high-yield companies becomes so fleet of foot, we take notice—especially because utilities are distinguishing themselves by more than their price action.

The average utility stock in the S&P 1500 earns a Quadrix Overall score of 67; not in 20 years have utilities enjoyed such strong fundamentals. So why aren't we adding more utilities to our recommended list? Here are four reasons:

Those superior fundamentals come at a price. Utility stocks look pricey relative to historical norms.

Two decades of history suggest utilities won' t hold their lead. The stock market tends to penalize utilities for their low growth and weak balance sheets over long periods of time.

The harsh winter boosted profits for many utilities in the last two quarters, making for stronger growth comparisons. If temperatures revert to normal levels, the group's operating momentum could recede quickly.

The sector's long-term growth picture doesn't look any better than the near term. Given the past/present dichotomy and utilities' average five-year profit-growth estimate of 5%, lowest of any sector, we expect the sector's Momentum scores to drop in coming quarters.

At the moment, we recommend just one utility—UGI (UGI), which earns Buy and Long-Term Buy ratings. UGI is a seller of propane and a provider of natural gas to about 600,000 customers in Pennsylvania.

Early this month, UGI announced plans to pay at least $547 million for a liquefied-petroleum-gas distributor in France, bolstering an international business that already accounts for 30% of revenue.

Its non-regulated operations give the company better growth potential than a traditional utility, with the consensus projecting per-share-profits 20% higher this year (helped by the acquisition) and nearly 8% annually over the next five years.

UGI has raised its dividend in each of the last 27 years, most recently, a 4% hike in April. The utility yields 2.3%, paying out just 39% of its earnings in dividends.

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