6 utility stocks with good return potential

Sporting low price-earnings multiples and ample dividend yields, utility stocks may be good values here says Andrew Bary of Barron’s.

In a recent article and accompanying short 1:09-minute video (see below), Bary argues that many utility shares could offer a total return of 15% or more over the coming year when their dividend yields – which are currently averaging just over 5% – are included:

Here’s my quick take on the six utility stocks mentioned in the video (the stars represent Dividendinvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):

American Electric Power [[AEP]] (0 stars) – This electric utility serves more than 5 million customers in 11 states in the eastern and mid United States:

Its shares, trading around $32 and yielding about 5.2%, have been weighed down recently by disappointing earnings results and currently appear to be about fairly valued by some measures and somewhat undervalued by others. Barring any significant changes in its fundamentals I wouldn’t mind owning AEP at lower levels despite its undistinguished dividend history. (Note: I’m currently short some put options against AEP (see here for details), and could be “put” the shares at $25 if the stock were to drop below that level before the options expire.)

Consolidated Edison [[ED]] (*****) – Serving customers in New York, northern New Jersey and eastern Pennsylvania, this utility company stands out as a Dividend Aristocrat – it has increased its dividend for 35 consecutive years (albeit it at a snail’s pace in recent years):

Trading at $41 and yielding a higher-than-average 5.8%, the shares appear overvalued by some measures but reasonably attractive when compared with recent historical valuations. However, a long-term linear regression trendline value of about $31 (not shown in the above chart) suggests there’s plenty of room on the downside if the share price were to revert to its long-term mean. I’d start getting more interested in ED somewhere in the mid $30s or below.

Duke Energy [[DUK]] (0 stars) – This utility company serves the U.S. South and Midwest:

Currently trading at almost $16 and yielding 6%, its shares appear fairly valued by some measures and somewhat attractive according to others. DUK’s dividend history in recent years has been spotty, but I’d still be interested in the stock at the right price – in this case at around $13-$14 or lower.

Edison International [[EIX]] (0 stars) – This utility distributes electricity to over 13 million people in central, coastal, and southern California:

Its shares, currently trading at $35 and yielding 3.6%, appear to be a reasonable value here, although the dividend yield at these levels is somewhat disappointing. Nor does the company have a long history of maintaining and increasing its dividend. Still, I’d be tempted at lower prices (i.e., mid to upper $20s or lower).

PG&E Corporation [[PCG]] (0 stars) – Trading at about $41 and yielding 4.1%, the shares of this California-based utility appear about fairly valued here, although comparisons with recent historic valuations suggest a more favorable perspective:

Still, the stock is trading well above its 30-year linear regression uptrend line (not shown above, but currently at $30-$31), suggesting plenty of risk to the downside if the stock were to simply “mean revert.” Couple this with its below-average dividend yield and a less-than-stellar dividend history, and it’s enough to have me looking elsewhere.

Southern Company [[SO]] (***) – This electricity distributor operates in Alabama, Georgia, Florida and Mississippi:

Its stock, currently trading at about $32 and yielding 5.4%, appears fairly valued by some measures and somewhat undervalued by others. The company has increased its dividend for eight consecutive years and has a recent five-year dividend growth rate of almost 4%. In addition, SO has the highest estimated five-year earnings growth rate – 8.5% according to MSN Money – of the utilities listed here. I’d be interested at about $29 or below.

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One Response to “6 utility stocks with good return potential”

  1. Hammachi Yakimono on March 13th, 2010 at 12:37 pm

    I own both Duke Energy (since 2006) and Southern Company (since 1979).
    I sold American Electric Power in order to buy Abbott, Heinz and Kimberly Clark. I plan to buy a little more Abbott and Heinz, but not anything else.