Utility stocks are among the best dividend payers in the market. However, their performance is underappreciated by many investors. These stocks are usually viewed as “boring” stocks with limited upside potential. It is true that utility stocks have pretty low Beta values. Thus, they are a little bit boring.
Nevertheless, these companies provide substantial dividends plus capital appreciation. In the last 10 years, shareholders of diversified utility companies enjoyed an annualized return of 9.61%. During the same period, S&P 500 (SPY) returned only 3%, annually. For the long-term oriented investor, utility stocks offer substantial profits with lower volatility.
In this article, I will be looking at diversified utility companies using Double Dividend O-Metrix Scores (DD O-Metrix) as a ranking system. Here, is a brief summary of this methodology:
DD O-Metrix = [(2 x Dividend Yield + Growth Estimate) / (P/E Ratio)] * 5
- Dividend Yield: Higher is better.
- EPS Growth: Higher is better.
- P/E Ratio: Lower is better. Since we are at the middle of the year, taking the average of trailing twelve month and forward P/E ratios will smooth the results.
The back-testing of this valuation technique on utility stocks shows that DD O-Metrix works very well over the long-term, such as five years. I am also continuously checking on specific sectors, and the formula works very well so far. Applying the above formula to diversified utility stocks gives us the following DD O-Metrix scores (Data is from finviz, and is current as of July 22):
EPS growth next 5 years
PG & E
PNM Resources (PNM) and Ameren Corporation (AEE) are not included in the analysis above. PNM has a negative P/E ratio of -78, and Ameren has an extremely high P/E ratio of 64.9. Whenever the P/E ratio is negative or extremely high, it is better to avoid these companies.
Depending on the benchmark chosen, the market has a DD O-Metrix score range between 4 and 5. Back-testing of this ranking system shows that companies with higher-than-average O-Metrix scores beat the market with lower volatility. Therefore, I expect the utility companies with 5+ scores to beat the market in the next 5 years. NV Energy, Westar Energy, DPL, CMS Energy, SCANA, Northwestern, and Alliant Energy have DD O-Metrix scores higher than 5 over a 10 scale. If the analyst estimates holds, a diversified portfolio of these companies is very likely to be an outperformer for the long run.
PG & E, Wisconsin, Avista, Exelon, Vectren, Northeast Utilities, Con Ed, ALLETE, NiSource, and PS Enterprise have DD O-Metrix scores that are more or less in line with the market. Naturally, I expect these companies to perform more or less the same as the market. However, utility stocks are less volatile with lower beta values. Their yields also offer a soft cushion during stock market crashes. Probably these stocks will perform the same as the market, but with lower volatility.
Based on the methodology above only Centerpoint, UGI, Nisource, and MGE Energy have DD O-Metrix scores below that of the market. If you are holding any of the stocks with below-average DD O-Metrix scores, you may want to think again. While they are still good companies, there are better opportunities among the diversified utility companies.
Disclaimer: As always do your own diligence before making any investment decisions. The data is based on finviz, and is current as of July 22. It is believed to be true, but there is no guarantee on its accuracy. The model above is designated for long-term oriented investors. However, analyst estimates are subject to large deviations. If you believe that your company will have a better/worse EPS growth, feel free to make the estimation yourself, using the DD O-Metrix as an additional tool.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.