Gas Gains for Utility Investors

10/03/2013 7:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

The utility sector has declined since March. But we're not ready to write-off utility stocks yet. While utilities have lagged the market in three of the last four calendar years, they delivered a superior return in each of the five years before that, explains Richard Moroney, editor of Dow Theory Forecasts.

So far this year, our portfolio of Top 15 Utilities has returned 18.8%, versus 12.9% for the S&P 1500 Utility Sector Index. Since the start of 2007, our utilities have returned 83%, outperforming the index by more than 41 percentage points.

AGL Resources (GAS) and New Jersey Resources (NJR) are being added to the portfolio, where they have spent time in the past. In both cases, we dropped the stocks, in part, because of a lack of growth. Now they have regained their stride.

AGL has underperformed the sector since we removed it from the list in 2011. But things are looking up for the utility, which serves 4.4 million customers in Georgia, Virginia, Tennessee, New Jersey, Florida, and Illinois.

The acquisition of Nicor drove much of AGL's robust sales growth, with gains at least 21% in each of the last six quarters. But profit growth was spotty until the last two quarters.

Per-share profits rose 23% in the June quarter and 13% in the March quarter, and AGL seems to have absorbed the last of its merger-related costs.

At 16 times projected earnings for 2014, AGL trades 3% below the median gas utility in the S&P 1500 Index. AGL's dividend yield of 4.0% is above the sector average of 3.7% and the average of 3.6% for gas utilities.

New Jersey Resources NJR earns a Quadrix Overall score of 93, the highest in the sector. Scores of 94 for Momentum and 96 for Earnings Estimates are also the sector's best, reflecting impressive growth in the first half of the year.

In the nine months ended June, New Jersey Resources' per-share profits rose 31%, helped by strong results at the non-regulated storage and transportation unit.

The company provides natural-gas service to about 500,000 customers in New Jersey. With gas prices at historically low levels, even after the recent recovery, the outlook for natural-gas heat remains solid.

New Jersey Resources trades at 18 times trailing earnings, 3% below the natural-gas utility median and 9% below its own five-year norm. The stock also looks cheap versus its history, based on price/sales and price/book ratios.

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