Power Up with this Top Trio of Utilities

04/16/2019 5:00 am EST

Focus: UTILITIES

Richard Moroney

Editor, Dow Theory Forecasts

Investors treat utilities different than they do other stocks. While such divergence is understandable, it can at times blind us to important truths, explains Richard Moroney, editor of Dow Theory Forecasts.

Most investors who target utilities do it in search of income, rather than because of their growth, valuation, or other intrinsic qualities. Reflective of this one-track approach, too many investors buy just one or two utilities, rather than diversifying within the sector.

As such, we created the Top 15 Utilities portfolio, a diversified basket of 15 stocks designed to offer a yield comparable to that of the average utility with superior price-return potential.

Since the start of 2007, that strategy has paid off, as our Top 15 Utilities have returned 266.3% including dividends, versus 160.5% for the S&P 1500 Utility Sector Index. We advise investors seeking utility exposure to purchase equal-dollar amounts of all 15 stocks, rather than relying on just a few names. Here's a look at three of those stocks.

Alliant Energy (LNT) provides electricity to 965,000 customers and natural gas to 415,000 customers, all in the Midwest. The company also operates two power plants and owns stakes in some non-regulated transportation businesses. Alliant has grown per share profits at least 10% in each of the last two calendar years.

The consensus projects profit growth of 4% this year, a number Alliant seems capable of exceeding, given recent approval for a hike in natural gas rates and cost controls at its two largest subsidiaries. In the wake of a 6% dividend increase in January, Alliant yields 3.0%. The stock earns an Overall rank of 56, well above average for a utility, and scores above 70 in both of our sector-specific metrics.

The "Overall" score of 65 out of 100 at DTE Energy (DTE)  is the best among our Top 15 Utilities, while it earns a 12-Factor Sector score of 66 and a 94 in reranked Overall. The company serves 2.2 million electric customers and 1.3 million gas customers in southeastern Michigan, including Detroit.

DTE’s sales have risen in 10 straight quarters, never gaining less than 9% during that stretch. Analysts expect both sales and profits to decline this year from weather-boosted 2018 results. With several rate cases outstanding and decent growth of the customer base, we see upside to the consensus. DTE yields 3.1%.

American Electric Power (AEP) operates 10 utility companies serving 5.4 million electricity customers from Texas to Michigan to West Virginia. The company also owns power plants that provide 12% of its revenue.

A series of rate hikes last year, coupled with pending rate cases in multiple markets, give us confidence that American Electric Power can exceed consensus expectations for profit growth of 4% this year and 7% next year. The dividend has risen in nine consecutive years and now equates to a yield of 3.2%.

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