The Utilities Are Struggling In 2012

by: The Financial Lexicon

Investors have not been kind to the Utilities sector thus far in 2012. It has been competing with Telecom for the worst performing sector in the S&P 500 (NYSEARCA:SPY) and has been underperforming the S&P 500 and Dow Jones Industrial Average (NYSEARCA:DIA) by a significant amount year-to-date. The table that follows provides the year-to-date performance of a number of popular utilities stocks (although not all of them). For comparison purposes, it also includes the performance of the S&P 500, DJIA, Utilities SPDR ETF (NYSEARCA:XLU), and two popular bond ETFs, the HYG (non-investment grade) and LQD (investment grade).

The performance for all securities and indices excludes any distributions (just capital appreciation). Although, even when taking into account what I will call accrued expected dividends (YTD prorated amount), the underperformance is still quite significant.


12/30/2011 Closing Price

2/9/2012 Closing Price

YTD Performance

Southern (NYSE:SO)




Dominion Resources (NYSE:D)




Exelon (NYSE:EXC)




Duke Energy (NYSE:DUK)




NextEra Energy (NYSE:NEE)




American Electric Power (NYSE:AEP)




FirstEnergy (NYSE:FE)




Consolidated Edison (NYSE:ED)




Pacific Gas & Electric (NYSE:PCG)








Public Service Enterprise Group (NYSE:PEG)




Xcel Energy (NYSE:XEL)




Entergy Corp. (NYSE:ETR)




Ameren Corp. (NYSE:AEE)




Edison International (NYSE:EIX)




Utilities SPDR




S&P 500




Dow Jones Industrial Average




iShares iBoxx $ High-Yield Corporate Bond Fund (NYSEARCA:HYG)




iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEARCA:LQD)




As you can see from the table, all but one of the fifteen utilities stocks shown are down year-to-date, compared to the S&P 500's 7.50% gain and the DJIA's 5.51% gain. Given some of the positively perceived economic data of late, it makes sense that we would see a rotation out of the stocks investors had been hiding out in and a move into more cyclical names. The degree of the underperformance is perhaps a testament to the amount of investors that had been hiding out in the utilities. If you are an investor who believes the overall market indices are headed for a fall in the near future, you might view this underperformance in utilities as a buying opportunity. Also, if you are a so-called dividend investor, you too might view this as an opportunity to initiate or add to a position.

Dividend investors who often claim to not care about the price action in a stock, but are instead only interested in receiving the dividend and hopefully a rising yield on cost over time, should keep the following in mind. Since the market bottom of 2009, some of the names in the table above are not showing the type of impressive dividend increases that investors have come to know in other companies. Therefore, if you are buying any of these names instead of, say, a similar or higher yielding bond or a different dividend-paying stock, just make sure you are aware of the company's recent history with regard to dividend increases and have done your homework on the company's likely future ability to pay out higher dividends.

Just as trades gone wrong often turn into "investments," so too might a dividend investor claim that capital depreciation and total return in a stock is irrelevant when the stock is declining, as long as the dividend continues to pay out. If you truly do not care about potential capital appreciation or lack thereof, keep in mind that it is not difficult to find comparable or even higher yields on corporate bonds with similar credit ratings as many of the utilities companies mentioned above.

To help any income-seeking investors who are interested in exploring alternatives to utilities stocks, the table that follows shows the credit ratings (from Moody's) of senior unsecured bonds of each of the aforementioned utilities companies (not the subsidiaries). The subsidiaries often have slightly higher credit ratings. As you will see, the majority of these companies have senior unsecured debt in the Baa region, a region in which you can still pick up decent yield if you exercise some patience and spend some time shopping around. For investors who are interested in buying the dip in utilities, rather than looking for alternatives such as bonds, the table also shows the total percentage increase in each company's dividend over the past three years (not the annual increase, but total). I hope you find this information useful as a piece of the puzzle when deciding which stocks to buy on the dip.


Corporate credit rating

Amount dividend increased in last 3 years.




Dominion Resources






Duke Energy



NextEra Energy



American Electric Power






Consolidated Edison



Pacific Gas & Electric



PPL Corp.



Public Service Enterprise Group



Xcel Energy



Entergy Corp.



Ameren Corp.



Edison International



It should be noted that Ameren cut its dividend dramatically just under three years ago. For the purposes of this article, I calculated the increase in the dividend shown in the table using the new lower amount announced in February 2009. I was not attempting to make things look better than they really were over the past three years. Rather, I was attempting to highlight how much Ameren has been able to increase its dividend during the so-called economic recovery. That percentage would have been lost had I included the drastic 39.37% dividend cut from early 2009.

I recognize that utilities play a unique role in many investors' portfolios. They do in mine as well. They are not traditionally thought of as equities that will provide stellar returns on a capital appreciation basis, but are rather often bought for the stable cash flows and traditionally reliable dividends. With that said, investors who truly have no concerns regarding potential capital appreciation (as some dividend investors will claim) could easily shift some of their money higher up the capital structure into fixed income and receive comparable yields given the credit profiles of many utilities companies. In addition, if benchmark yields are able to muster the typical seasonal rally (decline in price) in 2012 or if credit spreads widen, then even better yields in corporate bonds might await the patient investor.

For investors who do have some concerns about potential capital appreciation, there must be a point in time at which underperformance relative to the major indices becomes a concern (or at least a disappointment). Perhaps we are not yet at that point. But if the major indices keep rising on the back of cyclical, higher beta names, we may get there soon enough. On the other hand, if market indices begin to fall apart, I would expect a shift out of cyclical names back into the traditional hide-outs. In that case, this dip in utilities is likely an opportunity worth taking.

On a closing note, perhaps you are thinking that the year is young, and the data from this article can be disregarded. I would counter by saying that the markets have been sending a message over the past six weeks. The message is that the dividend-paying, "safety" stocks of 2011 are not needed to the extent they were in 2011 if the economic data continues to improve and Europe remains free of a non-"voluntary" (CDS triggering) sovereign default. Therefore, those investors interested in adding to or initiating new positions in utilities or other perceived "safety" stocks (see "These Dividend-Paying, 'Recession-Proof,' 'Bond Substitute' Stocks Are Underperforming" for a list of other such stocks) should at least think about that message. It might not stop you from purchasing any of these stocks, but at least think through what the market is telling us in light of the way you view the world and the future of equity markets.

I realize that some investors will argue that six weeks is not enough time to gauge a message from the markets. I am simply trying to point out that the change in the calendar year brought with it a shift in sector allocation. As you decide whether to initiate new positions, add to existing positions, or sell out of existing positions, I hope you find this information useful. Good luck and happy investing!

Disclosure: I am long EXC, FE, ETR, PPL.

Additional disclosure: I am long EXC bonds.