Late To The Party For Bonds? How About Utilities As A Bond Proxy

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Includes: AEP, ALE, ARTNA, ATO, AVA, AWK, BKH, CMS, CNP, CWT, D, DGAS, DUK, ED, EE, ES, FTS, LNT, MDU, NEE, NWE, NWN, PPL, RGCO, SCG, SJI, SJW, SO, SRE, STR, UGI, VVC, WEC, WR, XLU
by: ColoradoWealthManagementFund

Summary

There are 54 utility companies with at least 5 years of consecutive growth in dividends.

After going through the 54 companies and checking for yields and expected growth rates, I put together two top twenty lists.

The lists were based on assessing which utilities were likely to offer the quickest payback period and which were set to offer the largest total returns.

Since the original suggestions were made both lists outperformed the general utility sector.

After seeing the yields on bonds falling dramatically as investors fled equities and looked for yields, I've also seen other bond proxies increasing in price substantially. For instance, the highest quality triple net lease REITs have performed exceptionally well over the last couple of days. As I was searching for alternatives to bonds, I decided to run the numbers on a large group of utilities. These utilities were all included in David Fish's CCC List. Every stock in this list has at least 5 straight years of dividend increases.

The following chart tracks the various companies, the subsector (as assigned in the CCC list), the years of dividend increases, and the price change since Thursday and since the end of 2015. The light grey bars indicate the only four utility companies on the list that saw their share prices decline since news of Brexit broke:

Company Name

Symbol

Subsector

Years of Increases

Since Thursday

This Year

Sempra Energy

(NYSE:SRE)

Utility-Gas

12

0.95%

18.49%

SJW Corp.

(NYSE:SJW)

Utility-Water

48

2.39%

27.39%

Wisconsin Energy

(NYSE:WEC)

Utility-Elec/Gas

12

1.85%

25.67%

El Paso Electric Co.

(NYSE:EE)

Utility-Electric

5

1.00%

20.16%

MDU Resources

(NYSE:MDU)

Utility-Gas

24

-1.32%

26.75%

NorthWestern Corp.

(NYSE:NWE)

Utility-Elec/Gas

11

0.94%

14.25%

South Jersey Industries

(NYSE:SJI)

Utility-Gas

16

1.40%

32.19%

NextEra Energy

(NYSE:NEE)

Utility-Electric/Gas

21

3.28%

23.09%

UGI Corp.

(NYSE:UGI)

Utility-Electric/Gas

28

0.09%

30.51%

CMS Energy Corp.

(NYSE:CMS)

Utility-Elec/Gas

9

1.33%

24.56%

American Water Works

(NYSE:AWK)

Utility-Water

8

2.23%

36.75%

Alliant Energy Corp.

(NYSE:LNT)

Utility-Electric/Gas

12

1.48%

27.64%

Eversource Energy

(NYSE:ES)

Utility-Electric/Gas

17

2.39%

14.72%

California Water Service

(NYSE:CWT)

Utility-Water

48

1.76%

46.28%

Atmos Energy

(NYSE:ATO)

Utility-Gas

31

1.09%

23.52%

ITC Holdings Corp.

(ITC)

Utility-Electric

11

0.72%

17.04%

Vectren Corp.

(NYSE:VVC)

Utility-Electric/Gas

55

0.89%

23.03%

Duke Energy Corp.

(NYSE:DUK)

Utility-Elec/Gas

11

1.86%

17.65%

Allete Inc.

(NYSE:ALE)

Utility-Elec/Gas

5

0.40%

21.99%

Dominion Resources

(NYSE:D)

Utility-Electric/Gas

12

1.04%

10.81%

CenterPoint Energy

(NYSE:CNP)

Utility-Electric/Gas

10

-0.73%

26.20%

Southern Company

(NYSE:SO)

Utility-Electric

15

1.97%

11.56%

Allete Inc.

Utility-Elec/Gas

5

0.40%

21.99%

PPL Corp.

(NYSE:PPL)

Utility-Electric

14

-1.64%

7.15%

Avista Corp.

(NYSE:AVA)

Utility-Electric/Gas

13

1.43%

22.08%

Questar Corp.

(NYSE:STR)

Utility-Gas

36

0.32%

29.41%

American Electric Power Co.

(NYSE:AEP)

Utility-Electric

6

1.58%

17.30%

Northwest Natural Gas

(NYSE:NWN)

Utility-Gas

60

1.31%

23.81%

SCANA Corp.

(NYSE:SCG)

Utility-Electric/Gas

15

1.58%

21.33%

RGC Resources Inc.

(NASDAQ:RGCO)

Utility-Gas

12

-0.64%

17.03%

Westar Energy

(NYSE:WR)

Utility-Electric

11

0.13%

31.55%

Consolidated Edison

(NYSE:ED)

Utility-Electric

41

1.68%

24.05%

Alliant Energy Corp.

Utility-Electric/Gas

12

1.48%

27.64%

Black Hills Corp.

(NYSE:BKH)

Utility-Electric

45

0.05%

33.32%

Artesian Resources

(NASDAQ:ARTNA)

Utility-Water

18

4.39%

19.42%

Delta Natural Gas

(NASDAQ:DGAS)

Utility-Gas

11

2.55%

16.67%

Click to enlarge

Interesting Notes

The four utilities that declined in the price seem to have little in common. The first thing I checked was the subsector for each. While three included gas, PPL Corp. was simply listed as electric. Further, we can see some of the gas utilities did exceptionally well. Delta Natural Gas was up 2.55%.

To be entirely fair about that, PPL Corp. could be highlighted for more than having the worst returns since Thursday. It also has the worst price returns on the year with none of the other utilities failing to reach double digits.

I pulled up a Fast Graph to get a look at the performance for PPL:

Click to enlarge

The utility company is already trading above its normal P/E ratio, but the dramatic decline in interest rates generally justifies higher valuations on utility companies since investors will treat them as a bit of a bond proxy.

Dividend growth has been weak at best so it is fairly understandable for PPL to be lagging behind the competition.

Water Doing Well

Anything labeled as "utility-water" appeared to be doing well, but this is still a small sample size. The four "water" companies were up 1.76% to 4.39%. The weakest performance for a water company on the year was 19.42%, and that went to ARTNA. Ironically, ARTNA is also the best performer over the last couple of days.

Known Dividend Growers vs. Utility Indexes

So far this year the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) gained 17.95% and since Thursday it gained .87%. For this group of dividend growers the average gain was 23.14% on the year and 1.16% since Thursday.

Are Utilities Still Solid?

The case for investing in the utility sector is hampered by the increase in prices driving down the yields, but the premise of "lower for longer" or interest rates seems solid. The utilities didn't really take off until after the Federal Reserve raised rates for the first time and the market soon realized the Federal Reserve didn't have the answer.

Flatter Yield Curve

The market is shifting towards strong expectations of "lower for longer". On 06/27/2016 the yield curve flattened out further with the 2 year treasury dropping about 3.5 basis points and the 10 year treasury dropping a little over 11 basis points. The result is a strong expectation that rates are going to be stuck low for a fairly long time. If rates remain low, it makes the combination of a decent dividend yield and a little growth in that yield fairly attractive.

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

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.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.