Three Utilities with Low Price-to-Sales Ratios

10/01/2018 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In assessing utilities, no individual variable in our ranking system (know as Quadrix) has a better track record than the price-to-sales ratio, notes Richard Moroney, editor of Dow Theory Forecasts.

Utility stocks with the lowest price-to-sales ratios have outperformed by an average of 3.6% since 1994 and 2.9% over the past decade — higher than any of the roughly 200 other factors we monitor.

Price/sales is also one of the few value factors that’s been working recently, posting an average excess return of 7.4% over the past 12 periods — fourth-best among all factors. The ratio is also remarkably consistent, outperforming roughly two-thirds of the time since 1994.

Dividend yield, the metric prized by many utility investors, has proven highly effective in the past decade (outperforming by 1.7%) and moderately effective since 1994 (0.5%). It has lagged by 2.2% in the past 12 periods, however.

In the following paragraphs, we review three stocks from the Top 15 Utilities portfolio with above-average scores for both price/sales and dividend yield:

CenterPoint Energy (CNP) ranks among the top 20% of utility stocks in the S&P 1500 Index in four highly effective Quadrix factors, including price/sales ratio. The stock trades at 1.2 times trailing sales, versus the utility sector’s average of 2.5. CenterPoint’s unusually low price/sales ratio reflects steady sales momentum.

Revenue has risen in nine straight quarters and increased 14% during the 12 months ended June, while the sector averaged 4% growth. Only six stocks in the sector yield more than CenterPoint’s 4.0%. CenterPoint has raised its dividend 4% in each of the past four years.

CenterPoint operates regulated electric (31% of 2017 revenue) and natural-gas (27%) utilities, along with its energy-services unit (42%), which distributes natural gas to commercial customers and manages energy-related infrastructure assets.

MDU Resources (MDU) receives high marks for five of the 10 Quadrix factors that have historically proved especially effective for utility stocks. In addition to looking relatively cheap as measured by several key valuation ratios, MDU enjoys attractive long-term prospects for profit growth and rising analyst estimates for the current year.

MDU operates electric and natural gas utilities (27% of 2017 revenue). But its biggest business involves producing construction materials (41%), such as gravel and asphalt mix, and construction services (30%) for transmission lines and gas pipelines.

MDU has paid a dividend in 80 consecutive years and raised its payout in 27 straight years. In each of the past eight years, MDU has raised its dividend by $0.01 per share, with all hikes occurring in the December quarter. The stock is yielding 3.0%.

UGI (UGI), which draws the bulk of its business from distributing propane gas, is growing at an unrivaled rate within the S&P 1500 utility sector. In the 12 months ended June, UGI’s per-share profits jumped 26% on 25% revenue growth. No other utility stock grew both metrics more than 20% over the past 12 months.

UGI shares have returned 16% including dividends in 2018 and currently trade within 4% of their all-time high, set in August. Yet UGI earns a solid Quadrix Value score of 69 and trades at discount to the median S&P 1500 utility stock relative to both trailing earnings per share and sales. UGI’s Overall score of 90 is higher than any other S&P 1500 utility stock.

The consensus expects UGI to post a loss of $0.05 per share in the seasonally weak September quarter, though estimates are rising. For fiscal 2019 ending September, UGI is expected to grow per-share profits 4% and revenue 3%.

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