The S&P 1500 Utilities Index is up 11% so far this year, making it the fourth-best performer among the 11 broad sectors. Last year the index rallied a heady 18%, observes Richard Moroney, editor of Dow Theory Forecasts.
Considering their spotty growth, high debt levels, and rich valuations relative to historical norms, utilities are performing better than expected — especially with the Federal Reserve expected to keep raising short-term interest rates.
The 97 U.S. utilities we cover have an average trailing P/E of 23, roughly 21% above the five-year norm. In such an environment — and in all environments, really — you should be selective with utilities, purchasing only the strongest names.
Our Utilities portfolio is designed to provide ample income and solid capital-appreciation potential. Here's a look at two standouts from our portfolio.
Look for Edison International (EIX) to deliver solid earnings and dividend growth in the year ahead. The utility, which supplies electricity to roughly 50,000 square miles of territory in southern California, is benefiting from a constructive regulatory backdrop and operational improvements.
Healthy rate-base growth — projected to climb 8% annually through 2020 — should help drive profitability. Management targets dividend growth above the industry average.
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Edison typically increases the dividend in December. Last year the payout jumped 13%, following a 15% hike in 2015. Edison posted strong September quarter results. Aided partly by tax benefits, per-share earnings increased 12% to $1.44, outpacing the consensus of $1.33.
Importantly, management raised full-year guidance to a range of $4.27 to $4.37, implying at least 8% growth. Edison targets a dividend payout ratio of 45% to 55% of the earnings of its core utility, Southern California Edison. The stock is yielding 2.7%.
Vectren (VVC) has returned 28% including dividends this year, outstripping the average gain of 16% for midcap utilities. The company, which provides gas and electricity to more than 1 million customers in Indiana and Ohio, increased its dividend 7% on Nov. 3 and 5% annually over the last three years.
Vectren has delivered 58 consecutive years of higher dividends. In the September quarter, per share earnings rose slightly to $0.75, topping the consensus of $0.66. Non-utility operations, which provide pipeline-construction and energy services, saw profits surge 31%.
For 2017, management expects per-share earnings of $2.55 to $2.65, bracketing the consensus of $2.63. Last year Vectren earned $2.55 per share. Management’s long-term outlook calls for annual earnings and dividend growth of 6% to 8%. Vectren yields 2.5%.
