Dividends or Not, Utilities Need To Perform (XLU, SO, D, DUK, FPL, AEP, ETR, FE, EIX, PGN, PPL, XEL, DTE, AES, CEG, NRG, CPN, AYE, NU, PNW, POM, NST, OGE, TE)

Investors love dividends, and big stable utility stocks often have some of the highest dividends of any class of stocks.  There has just been one problem… Dividends or not, utilities are sucking power and energy out of common stock portfolios of the American public.  In fact, utilities have been among the worst of the worst when it comes to performance.

We wanted to take a look at Select Sector SPDR Trust (NYSE: XLU), Southern Company (NYSE: SO), Dominion Resources, Inc. (NYSE: D), Duke Energy Corporation (NYSE: DUK), FPL Group, Inc. (NYSE: FPL), American Electric Power Company (NYSE: AEP), Entergy Corporation (NYSE: ETR), FirstEnergy Corporation (NYSE: FE), Edison International (NYSE: EIX), Progress Energy Inc. (NYSE: PGN), PP&L Corporation (NYSE: PPL), Xcel Energy Inc. (NYSE: XEL), DTE Energy Company (NYSE: DTE) and more.

There may actually be some time for them to shine in the near future. Despite the rally market of the last month, almost none of these stocks are within 5% of their 52-week highs.  We showed the dividend yields implied here, although as with all ‘yields’ there is often some distortion.  What we did not show was a P/E ratio because of the lagging effect of that, but we did show was the closing price for March 31 as the quarter closed and compared that to the 52-week trading range and compared it to the average consensus price target from Wall Street analysts per Thomson Reuters.

So why is this sector in the spotlight?  The dividend yields should be attractive enough.  Most are 4% and higher.  This offers defensive stock positioning, dividend yields, and the hope for some upside.  Of course, some are barren of a dividend due to issues and turnarounds. That keeps investors from having to go out to REITs and take on all the risks there associated with land values and trends.  Historically, utilities have been largely considered defensive stocks in hard times.  Morningstar noted in its quarterly wrap-up, “Utility stocks were hurt in the quarter by falling commodity and energy prices, bearish earnings outlooks as firms reported earnings, and a generally negative view of the future of electricity demand.”  The problem with that call is that energy demand is not dropping any longer and some larger companies are starting to increase their power usage again.

So what is working against utilities?  The big fear is rising rates and then the coming regulation of carbon emissions.  Rates are rising down the road, and utilities historically do better in low rate environments because they have to borrow long-term for building their infrastructure.  And it is hard to find many who do not believe that an emissions tax is coming.  If you burn coal or natural gas, you have emissions and the current climate is one of taxation regardless of which side of the aisle you are on.

But there are several things working here that may actually work in favor of the utilities.  By and large, the P/E ratios are under the market average, as most trade at an average of about 13-times earnings (more than a 10% discount to S&P).  They should be because they are not growth stocks.  The economy is recovering, and that means more power consumption from large electricity using companies and entities now that business is getting back to normal.  Housing has stabilized or at least gotten out of the death spiral.  And as bad as the labor market is, things are far less bad than they were two quarters ago.  The administration has decided to endorse nuclear power.  And the fear that energy prices will head through the roof is not present as much as it was.  That means that utilities do not have to worry about input costs automatically exceeding revenue per customer.

It is growing easy to find 4% dividend yields now in the utility sector.  Even the key Utilities Select Sector SPDR (NYSE: XLU) ETF, which has sporadic dividends due to the nature of ETFs and rolling dividend payments, has a dividend yield of more than 4% if you add up the last four trailing dividends and base it on today’s price.  And President Obama just sent out billions of dollars for the utilities to collectively do more for a smart grid and for alternative energy and more energy efficiencies.

Analysts are VERY mixed on utilities.  Last Thursday Citi gave Mirant Corp. (MIR), RRI Energy (RRI), and Public Service Enterprise Group Inc.(PEG)  “sell” ratings.  First Energy (FE), NRG Energy (NRG) and PPL Corp. (PPL) were cut to hold.  But this follows a rival’s huge upgrade last summer, and based upon the share prices there is not much difference.  NRG Energy (NRG) and FPL Group (FPL) were just started as “Buy” ratings at Wunderlich.

Still, many consensus analyst price targets by Thomson Reuters are well above the current prices.  And the defensive nature of these stocks should offer at least some support if that feared correction every comes that so many worry about either for valuations or for the fear of a rate inspired double-dip recession.  Many utilities are seeking rate hikes, and depending upon whom you ask or what your own outlook is there are some who feel much more consolidation may be coming in the sector.  Warren Buffett tried to snag Constellation, and many thought his “whale of a deal” would be in a utility rather than a railroad.

Some of these utilities offering the most upside to average analyst price targets are Calpine Corporation (NYSE: CPN); FPL Group, Inc. (NYSE: FPL); American Electric Power Company (NYSE: AEP), PP&L Corporation (NYSE: PPL), AES Corporation (NYSE: AES) (with international operations), NRG Energy, Inc. (NYSE: NRG), and Capine Corporation (NYSE: CPN).

We have shown a breakdown of these major utilities as follows:

Select Sector SPDR Trust (NYSE: XLU) $29.66
52wk Range: 24.97 – 32.08; Yield:    3.33%

Southern Company (NYSE: SO) $33.16
1yr Target Est: 33.78; 52wk Range: 27.19 – 34.47; Yield: 5.28%

Dominion Resources, Inc. (NYSE: D) $41.11;
1yr Target Est: 39.86; 52wk Range: 28.70 – 41.61; Yield: 4.29%

Duke Energy Corporation (NYSE: DUK) $16.32
1yr Target Est: 16.69; 52wk Range: 13.31 – 17.94; Yield: 5.79%

FPL Group, Inc. (NYSE: FPL) $48.33
1yr Target Est: 54.89; 52wk Range: 45.29 – 60.61; Yield: 4.03%

American Electric Power Company (NYSE: AEP) $34.18
1yr Target Est:    38.25; 52wk Range: 24.75 – 36.86; Yield: 4.76%

Entergy Corporation (NYSE: ETR) $81.35
1yr Target Est: 88.55; 52wk Range: 63.39 – 84.44; Yield: 3.66%

FirstEnergy Corporation (NYSE: FE) $39.09
1yr Target Est: 44.36; 52wk Range: 35.26 – 47.82; Yield: 5.66%

Edison International (NYSE: EIX) $34.17
1yr Target Est: 38.59; 52wk Range: 27.50 – 36.72; Yield: 3.62%

Progress Energy Inc. (NYSE: PGN) $39.36
1yr Target Est: 40.23; 52wk Range: 33.50 – 42.20; Yield: 6.30%

PP&L Corporation (NYSE: PPL) $27.71
1yr Target Est: 32.75; 52wk Range: 27.40 – 34.42; Yield: 4.97%

Xcel Energy Inc. (NYSE: XEL) $21.20
1yr Target Est: 22.09; 52wk Range: 16.83 – 21.94; Yield: 4.62%

DTE Energy Company (NYSE: DTE) $44.60
1yr Target Est: 43.69; 52wk Range: 27.32 – 45.93; Yield: 4.69%

AES Corporation (NYSE: AES) $11.00
1yr Target Est: 17.33; 52wk Range: 5.62 – 15.44; Yield: NO DIV

Constellation Energy Group, Inc. (NYSE: CEG) $35.11
1yr Target Est: 38.63; 52wk Range: 20.18 – 36.99; Yield: 2.70%

NRG Energy, Inc. (NYSE: NRG) $20.90
1yr Target Est: 27.08; 52wk Range: 16.50 – 29.26; Yield: N/A

Calpine Corporation (NYSE: CPN) $11.89
1yr Target Est: 14.00; 52wk Range: 6.64 – 14.95; Yield: N/A

Allegheny Energy, Inc. (NYSE: AYE) $23.00
1yr Target Est: 23.73; 52wk Range: 20.40 – 29.85; Yield: 2.62%

Northeast Utilities (NYSE: NU) $27.64
1yr Target Est: 28.29; 52wk Range: 19.78 – 28.00; Yield: 3.49%

Pinnacle West Capital Corporation (NYSE: PNW) $37.73
1yr Target Est: 37.60; 52wk Range: 25.28 – 38.37; Yield: 5.51%

PEPCO Holdings Inc. (NYSE: POM) $17.15
1yr Target Est: 16.05; 52wk Range: 11.45 – 17.57; Yield: 6.29%

NSTAR (NYSE: NST)  $35.42
1yr Target Est: 35.43; 52wk Range: 28.54 – 37.75; Yield: 4.27%

OGE Energy Corporation (NYSE: OGE) $38.94
1yr Target Est: 38.80; 52wk Range: 23.19 – 39.32; Yield: 3.64%

TECO Energy, Inc. (NYSE: TE) $15.89
1yr Target Est: 16.23; 52wk Range: 10.28 – 16.71; Yield: 5.00%

We won’t call these growth opportunities, even if many do have price appreciation opportunities.  Whether you look for safety in defensive stocks, income from dividends, or “value investing” picks at a discount to the market… utilities may finally be worth a look.

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JON C. OGG