A Trio of Utilities for a Rising Rate Environment

02/20/2018 5:00 am EST

Focus: UTILITIES

Richard Moroney

Editor, Dow Theory Forecasts

Even in a time of rising rates, utility stocks have their place in a portfolio, as a form of diversification and source of income, notes Richard Moroney, editor of Dow Theory Forecasts; here, he reviews a trio of stocks in his utilities model portfolio.

Quardrix is our proprietary quantitative ranking system which focuses on fundamental and technical factors in assessing stocks. In this review, we identified Quadrix factors especially effective for the S&P 1500 utility sector, as shown at right.

For instance, utility stocks scoring in the top quintile for price/sales ratio outperformed the average stock in the index by an average of 3.4%, based on rolling 12-month periods since 1994.

Notably each of these six factors work better for utilities than they do for the broad index. Unfortunately, just a handful of utilities currently score above 80 for them. But the Value score also works for utilities, outperforming by 1.7% on average, which gives investors more options.

An electric utility, Edison International (EIX) earns a Quadrix score of 90 for price/cash flow, one of the most effective factors for utility stocks. It also scores above 60 for price/sales and price/book, two other factors that work particularly well.

The stock yields 4.1%, the fruit of Edison growing its dividend at an annualized rate of 15% over the past three years. The stock slumped in December on worries it could face damage claims for the wildfires in California, but the selling seems overdone.

UGI (UGI)  kicked off a strong start to fiscal 2018 ending September by posting 11% higher earnings per share in the December quarter on 27% revenue growth. For the full fiscal year, the consensus forecasts 15% growth for both per-share profits and sales.

Encouragingly, analyst estimates have risen sharply since UGI’s quarterly report. At less than 17 times estimated 2018 profits, UGI shares trade 15% below the median S&P 1500 gas utility stock.

Vectren (VVC) operates three regulated utilities in Indiana and Ohio, complemented by businesses that build pipelines and other types of infrastructure. In November, the company announced a 7% dividend hike, marking its largest annual increase since 1990.

Vectren has raised its dividend for 58 straight years. Vectren has been considering its strategic options since receiving takeover interest, according to a Bloomberg story from last August. The shares rallied in early February on a report that Vectren has kicked off its sale process.

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