Utilities Will Trump The Dogs Of The Dow In 2012

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 |  Includes: AEE, AEP, CMS, DIA, DUK, ED, QQQ, SPY
by: Investment Underground

Thomas Hughes

The Dogs of the Dow are hot news right now. Their combined performance is the highlight at the end of this fiscal year. These 10 Dow components returned an average 17% when adjusted for dividend payouts. Pretty nice compared with poor performances from the general market. The Dow (NYSEARCA:DIA) leads 2011 with a modest 5.5% gain, the S&P (NYSEARCA:SPY) comes in second with a basically flat year and the Nasdaq (NASDAQ:QQQ) finished last with a disappointing 1.8% decline. What is the underlying difference? Dividends. The Dow components average around 3.5% yield, whereas the NASDAQ 100 only average .9%. The S&P 500 average 2%. All 30 Dow components produce dividends, only 80% of the S&P and a meager 44% of the NASDAQ 100 pay. With this in mind it is quite easy to see why the Dow out performed the other major index's this year.

Looking ahead to the next year I expect to see much of the same. US GDP growth is expected to total 1.8% for 2011 with only a slight increase for 2012. Predictions for next year are for 2.3% total US growth. This is actually optimistic. Europe is looking forward to more troubles in 2012 and China is expecting slower growth as well. There is really no reason to expect a 2012 bull market. At best I think that we will continue to see a continuation of the current trend, a trend started in early 2009 as we were coming out of our own financial crisis. This will take the Dow to 14,000, where it goes from there is totally dependent on what happens in 2012.

There are still some hot sectors to be found with stocks yielding rates comparable to the Dow dogs. One of those is electric utility companies. Several stocks in this sector are breaking out of resistance and poised to make big gains. Not to mention paying attractive dividends.

Top on my list Duke Energy (NYSE:DUK). After purchasing power provider Progress Energy earlier in this Duke Energy became the nation's largest electric utility. Duke is currently breaking out above long-term resistance with indications of continued advancement. Duke is also paying a dividend yielding 4.5%, above average compared with the DOW. Duke earnings have outpaced guidance and analyst expectations for 2011. Corporate guidance increased by $0.05/share to a range of $1.40 to $1.45. Earnings for 2012 are expected to improve as well. Duke is in the process of implementing four initiatives that are designed to improve profitability in 2012. One of Duke's plans is to improve its coal burning output by replacing old, inefficient plants with newer ones. These new plants will comply with new EPA regulations starting in 2012.

Next up is Ameren Corporation (NYSE:AEE). Ameren is a smaller utility servicing the mid west, primarily Missouri and Illinois. Some of Amerens attractions include 60% institutional ownership, p/e of 12.6 and a dividend yielding 4.8%. Ameren is also breaking through resistance, trading around $33 a share, but is probably entering a trading range. I expect to see further resistance at $35 and $40.

Ameren support has been growing for several reasons. It is lowering costs, increasing revenue and also increased its dividend. Ameren upped its corporate guidance for fiscal 2011 to $2.50-$2.60 from its earlier estimate of $2.30-$2.55. Ameren is expecting to see improvements into 2012.

American Electric Power (NYSE:AEP) is another power provider on the move. Despite lowering overall outlook for 2011 investors are still being attracted to this stock. Currently trading around $41, AEP is still undervalued on a p/e basis when compared to Duke (15.3) and Consolidated Edison (17.57). Current p/e for AEP is 13.3. A recent increase of dividend, another trend in the electric utility sector, of 2.2% is one cause of interest. AEP currently yields 4.55%, or $1.88 annually. However, I think the strongest argument is AEP's 67% increase in earnings for Q3 2011 compared with the previous year. Gains were attributed to a favorable court ruling in Texas, and increased demand. AEP has recently broken out above its long-term resistance and indicators favor a continued bull market in AEP.

CMS Energy Corporation (NYSE:CMS) is a world wide integrated energy company. It operates domestically in Michigan under its subsidiary, Consumers Energy Company, and Internationally as CMS Enterprise Company. CMS is yet another stock breaking up through long term resistance, a break out that could take it as high as $25 or $30 by 2014. CMS is currently trading around $22 and yields 3.8%. CMS has been operating in-line with its expectations for the year. Q3 earnings for 2011 came in one cent above estimates. Earnings for the first nine months of 2011 were up 12% from 2010. Fourth quarter earnings are expected to be a little light due to increased spending and weather conditions. Growth in 2012 is expected to continue at a rate between 2% and 3%.

Consolidated Edison Inc, (NYSE:ED) has been making new all-time highs since late August of this year. Volume since its break above the previous all time high around $56 came on high volume, an increase which has carried through to the present. Another increase reported by Consolidated Edison is revenue and earnings. For the first nine months of 2011 ED earnings are up $0.25/share to $2.94, a gain of 10% over the same period 2010. Full year guidance was revised to the upper end of the previously released estimate of $3.45-$3.65. Full year expectations are now $3.55-$3.65 per share.

ED's dividend is currently yielding around 3.9% with a p/e of 17.57. These numbers put it last on my list but in no way disqualifies Con Ed. Increased earnings, a strongly trending market and an attractive dividend will drive ED to $70 or higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.