How Utilities SML Dogs Were Wired
Yield (dividend/price) results from here verified by Yahoo Finance were calculated as of January 7, 2015 for Small, Mid, & Large cap Utilities stocks. Small cap firms were valued at $200M(illion) to $2B(illion), Mid cap firms were worth $2B to $10B, Large caps were valued above $10B. Those yield results led to the actionable conclusions discussed below.
50 For the Money
Since late 2011, this report series has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance: basic materials (BasMats), consumer goods (ConGo), financials (Fins), healthcare (Heal), industrial goods (IndiGo), services (Svcs), technology (Tec), and utilities (Utes). In the past two years, the series expanded to report (1) dividend yield, (2) price upside, (3) net gain results based on analyst one year target projections.
This article was intended to reveal bargain stocks to buy and hold up to one year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins's book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins's system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.
Dog Metrics Metered Utilities Stocks by Yield
Actionable Conclusion (1) Diversified Utilities Dominate Yield Rankings
Of 10 stocks with the biggest utilities sector dividend yields after November, per Yahoo Finance, 5 represented the diversified group, 2 gas, and 3 electric.
Tops by yield was one of the five diversified firms, Southcross Energy Partners, L.P. (NYSE:SXE) . The four other diversified firms placed second, fourth, seventh, and eighth: TransAlta Corp. (NYSE:TAC) , TerraForm Power Inc. (NASDAQ:TERP) , Pattern Energy Group Inc. (NASDAQ:PEGI) , and Brookfield Renewable Energy Partners LP (NYSE:BEP) .
The three electric utilities placed sixth, ninth, and tenth: Abengoa Yield PLC (NASDAQ:ABY) , NRG Yield Inc. (NYSE:NYLD) , and Brookfield Infrastructure Partners L.P. (NYSE:BIP) , and completed the January utilities top 10 dog list by yield.
Utility Dogs Dividend & Price Results Compared With The Dow Dogs
Graphs below per market close 1/7/16 compared relative strengths of the top 10 utilities sector dogs by yield with those of the Dow industrials index. Annual dividend history from $10k invested as $1k in each of the 10 highest yielding stocks along with the total single share price of those 10 stocks made the data points shown in green for price and blue for dividends.
Actionable Conclusions: (2) Utilities Were Very Bearish As (3) Dow Dogs Mixed Down
As of January 6, dividend from $10k invested as $1k in each of the top 10 utilities stocks soared skyward 18.8% while aggregate single share price dropped 25.8% to confirm the bearish move.
Dow dogs mixed down in dividend and price after November/December. Projected annual dividend from $10k invested as $1K in each of the top 10 fell 1.35%. At the same time, aggregate single share price dropped 6.3% to confirm the mixed down move.
The Dow dogs overbought condition (in which aggregate single share price of the 10 exceeded projected annual dividend from $1k invested in each of the 10) narrowed slightly.
[I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM (NYSE:IBM)) could return to a normal balance where annual dividends from 10 $1k investments can again exceed the aggregate single share price of those top 10 stocks.]
Actionable Conclusion (4): Dow Dogs Remain Overbought
The overhang was $239 or 62% for February, widened to a record gap of $388 or 102% in March, shrank back to $291 or 79% for April, widened to $320 or 90% to begin May, and soared to the new record $406 or 112% in June. The Dow bubble deflated as DuPont (NYSE:DD) replaced IBM in the 10 slot of the top 10 for July to peg the gap at $269 or 71%, then inflated again as IBM replaced Pfizer (NYSE:PFE) to widen the gap to $331 or 85% for August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) pushed the gap to $334 or 85%. November changed out McDonald's (NYSE:MCD) for Wal-Mart (NYSE:WMT), and GE (NYSE:GE) for Coca-Cola (NYSE:KO). The resulting price over dividend gap went to $303 or 78%. Come January, GE bumped WMT out of the 10th slot to drop both price and dividend of the 10 top dogs, and the gap went to $256 or 66%.
This gap between high share price and low dividend per $1k invested defines the Dow overbought condition. Meaning these are low risk and low opportunity Dow dog stocks.
Conversely, the utilities dog chart shows them to be increasingly higher risk but also potentially higher gain pups than those of the Dow.
Wall Street Wizard Weights
One-year median target price set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare 10 stocks showing the highest upside price potential into 2016 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were considered best for the most accurate mean target price estimate.
Actionable Conclusion (5) 10 Utilities Dividend Dogs Projected January Upsides of 31.43% to 129.01%
Dog Metrics Gauged Utilities Stocks by Yield
To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" measure of upside potential. Added to the simple high yield "dog" metrics, analyst mean price target estimates provided another tool to dig out bargains.
Actionable Conclusions: Wall St. Wizards Wanted Average (6) 26.77% Upsides & (7) 28.77% Net Gains from Top 30 Utilities Dogs By January 2017
Top 30 dogs from the utilities sector were graphed below to show relative strengths by dividend and price as of January 7, 2016 and those projected by analyst mean price target estimates to the same date in 2017.
A hypothetical $1k investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter, the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2017.
Historic prices and actual dividends paid from $30k invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those 20 stocks divided by three created data points for 2016. Projections based on estimated dividend amounts from $1k invested in the 30 highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by three created the 2017 data points green for price and blue for dividend.
A 24.65% lower dividend was projected from $10k invested in this group while aggregate single share price was seen to increase by 18% in the coming year. The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).
A beta (risk) ranking for each stock was provided in the far right column on the above chart. A beta of one meant the stock's price would move with the market. Less than one showed lower than market movement. Higher than one showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposite market direction.
Actionable Conclusion (8): Wall St. Wizards Guesstimated 10 Utilities Dogs Would Net 36.22% to 157.5% by January 2017
Seven of the 10 top dividend yielding utilities dogs were verified as being among the 10 net gainers for the coming year based on analyst one year target prices. So this month, the dog strategy for this sector as graded by Wall St. wizards was 70% accurate.
10 probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance by 2017:
Southcross Energy was projected to net $1,575.42 based on dividends plus the lowest target price estimate from one of eight analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 134% more than the market as a whole. Analyst optimism for SXE was so high (or ancient) that halving the projected dividend and using the lowest target price could not dislodge this utility from the top slot.
TerraForm Power Inc. was projected to net $952.92 based on the median price estimate from 10 analysts plus dividends less broker fees. A Beta number was not available for TERP.
Western Gas Equity (NYSE:WGP) was projected to net $684.92 based on estimates from 14 analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 36% more than the market as a whole.
NRG Energy Inc. (NYSE:NRG) was projected to net $585.68 based on estimates from 14 analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 6% less than the market as a whole.
ONEOK Inc. was projected to net $580.53 based on dividends plus a median target price estimate from 14 analysts less broker fees. The Beta number showed this estimate subject to volatility 39% more than the market as a whole.
NRG Yield Inc. was projected to net $559.11 based on estimates from 14 analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 2% more than the market as a whole.
Brookfield Infrastructure Partners L.P. was projected to net $514.75 based on dividends plus the median target price estimate from seven analysts less broker fees. The Beta number showed this estimate subject to volatility 19% more than the market as a whole.
Pattern Energy Group Inc. was projected to net $459.13, based on dividend plus median target price estimates from 13 analysts less broker fees. The Beta number showed this estimate subject to volatility 22% more than the market as a whole.
Abengoa Yield PLC was projected to net $362.22 based on estimates from 11 analysts plus dividends less broker fees. A Beta number was not available for ABY.
The AES Corporation (NYSE:AES) was projected to net $305.80 based on dividends plus a median target price estimate from 10 analysts less broker fees. The Beta number showed this estimate subject to volatility 26% more than the market as a whole.
The average net gain in dividend and price was 66.67% on $10k invested as $1k in each of these 10 utilities dogs. This gain estimate was subject to average volatility 35% more than the market as a whole.
Dog Metrics Extracted More Bargains From Five Lowest Priced Highest Yield Utility Dogs
10 small, mid, and large cap utilities equities were culled by yield from here. Yield (dividend/price) results verified by Yahoo Finance did the ranking.
Actionable Conclusions: Analysts Allege Five Lowest Priced of 10 Highest Yield Utilities Dividend Dogs (9) Generate 76.78% Vs. (10) 60.88% Net Gains by All 10 by January 7, 2017
$5k invested as $1k in each of the five lowest priced stocks of the top 10 utilities dividend kennel by yield were predicted by analyst one-year targets to deliver 26.11% more net gain than $5k invested as $.5k in all 10. The very lowest priced utilities dividend dog, Southcross Energy Partners, L.P., was projected to deliver the most net gain of 157.54%.
Lowest priced five utilities dividend dogs for January 7 were Southcross Energy Partners, L.P., TransAlta Corp., TerraForm Power Inc., NRG Yield Inc., and Abengoa Yield PLC, with prices ranging from $2.62 to $17.50.
Higher priced five utilities dividend dogs for November 12 were Pattern Energy Group Inc., ONEOK Inc., Brookfield Renewable Energy Partners LP, Suburban Propane L.P., and Brookfield Infrastructure Partners L.P., whose prices ranged from $19.26 to $33.96.
This distinction between five low priced dividend dogs and the general field of 10 reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The same technique may also be used to find the more rewarding dogs in the Utilities kennel.
The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.
A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.
Stocks listed above were suggested only as reference points for a small, mid, and large cap utility equities dividend stocks as of early January 2016. These were not recommendations.
Gains/declines as reported did not factor in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
See my instablog for specific instructions about how to best use the dividend dog data featured in this article. - Fredrik Arnold
Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: I am/we are long GE, PFE, VZ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.