Under times of stress, utility and conventional businesses are the best hedge against adverse volatility. With stable dividends and cash-flow streams, these stocks provide sustainability to investors' portfolios and are a good source of income too. The stock market went up too much since the beginning of this year and we think industrial and utility stocks will be better investments for the next 12 months. In this article we will take a closer look at five stocks from these sectors:
Inergy, L.P. (NRGY) is a wholesale and retailer of propane. The company also owns and operates a natural gas storage and transportation business [Natural gas liquids (NGL) processing] as well as fractionation, storage, marketing and salt production businesses. Trailing and expected dividend yields from the company remain very high at 15.7% and 12.6% respectively. However, the price-to-earnings ratio is 32.5. The earnings per share growth percentage for next year is expected to be 27%, while the PEG ratio currently stands at 10.8. Though the stock's valuations are expensive at the current price level we cannot ignore such high dividends and will keep a favorable stance on the stock.
Pepco Holdings, Inc. (POM) is a holding company that, with its regulated public utility subsidiaries, operates in the transmission and distribution of electricity and natural gas. Through its subsidiary, Pepco Energy Services, Inc., the company also provides renewable energy services to government and institutional customers. In July, 2010, the company sold its Conectiv Energy's wholesale power generation business to Calpine Corporation (CPN). Pepco Holdings offers training and forward dividend yields of 5.5% and 5.6% respectively. Although the stock has modest valuations with a forward price-to-earnings ratio of 15.4 and a PEG ratio of 2.4, earnings per share are expected to grow at a 5.2% rate. However, the company's track record has not been very encouraging. In our opinion investors should focus on other high-dividend yielding stocks.
PPL Corporation (PPL) is an energy and utility holding company. PPL, through its subsidiaries generates and markets electricity in the northeastern, northwestern and southeastern United States. The company also delivers natural gas to Kentucky. In November, 2010, PPL acquired E.ON U.S. LLC from a wholly owned subsidiary of E.ON AG. PPL is slightly cheap on valuations with trailing and forward price-to-earnings ratios of 9.6 and 11.4 respectively. The company's stock seems expensive based on its price to free cash flow ratio (26.9). The stock offers a forward dividend yield of 5.2% with a PEG ratio of 7.2. The past 5-year average earnings per share growth has been in the vicinity of 18.8%, however the forward earnings per share value is expected to decline by 8.1%, justifying slightly cheaper multiples for the company's stock. In our opinion the dividend yield offered by the company cannot be ignored but there is little room for stock price appreciation.
Integrys Energy Group, Inc. (TEG) is an energy holding company operating in five segments: natural gas utilities, electric utilities, energy services, electric transmission investment, and holdings in other companies. Intergrys Energy Group has regulated natural gas and electric utility operations, non-regulated energy operations, and a 34% equity holding in the American Transmission Company LLC. The company serves 1.67 million customers in Chicago, Wisconsin, and Michigan, with its natural gas utility service. In September 2011, the company acquired Pinnacle CNG Systems and Trillium USA. The expected dividend yield from the company stands at 5.3%, while the stock is trading at modest valuations (a forward price-to-earnings ratio of 14.3 and a price to free cash flow ratio of 8.1). The company's earnings per share value is expected to increase by 7.1% next year, while its PEG currently stands at 3.2. We like this stock as a long-term investment.
R.R. Donnelley & Sons Company (RRD) is a global provider of integrated communications. The Company operates primarily in the printing industry, with related products and services. Last year the company acquired Andover, LibreDigital, Genesis Packaging & Design Inc and StratusGroup, Inc. The stock trades at extremely cheap valuations with trailing and forward price-to-earnings ratios at 4.5 and 6.4 respectively. The expected dividend yield and the price to free cash flow ratio for the company stand at 9.2% and 6.9 respectively. However, the forward earnings per share is expected to decline by a meager 1.7%. Despite this, we will rate the stock as our favorite among the industrial sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.