Utility stocks have retraced from the great price gains in 2011. Year to date through February 17, the S&P Utilities Index fell 3.2%, versus an 8.2% gain for the S&P 500. In 2011, this sector index was up 14.8%, versus a flat showing for the 500. There are four sub-industry indices in this sector, with Electric Utilities being the largest at 53.7% of the sector's market value. With only modest improvement expected in the housing and power markets for 2012, the sector's EPS outlook is below average. However, I expect the sector's high dividend yield (recently at 4.2%) to at least be maintained, if not rise slightly, and the electric utility revenues and gas utility gross margins will increase. Investors should focus on highly rated utilities that have pulled back from the 2011 price run up. Here is a starting list of potential stocks worth consideration.
American Electric Power Company (AEP) engages in the generation, transmission, and distribution of electric power to retail customers. The company generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric energy. AEP is trading at $38.23 with a dividend yield of 4.92%. Year to date, AEP is down 7.5% which creates an opportunity to buy the stock at a cheaper price. AEP posted Q4 operating EPS of $0.40, vs. $0.38 a year ago. Results reflected benefits of rate increases being partially offset by higher storm restoration costs, regulatory disallowances, and customer losses in Ohio. With legal challenges behind it, we expect the new state-of-art Turk power plant to come online by year-end.
Consolidated Edison (ED) provides energy services to residential, commercial, industrial, and government customers in the United States. ED is trading at $58.43 with a dividend yield of 4.14%. Year to date, ED is down 5.8% compared to an annual return of 23%. ED had Q4 operating EPS of $0.74, vs. $0.69 a year ago. Results reflected rate hikes designed to recover a rise in certain O&M costs and property taxes. ED's declaration of a 0.8% increase in the dividend maintains the current 4.1% yield.
TECO Energy (TE), an electric and gas utility company, through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electric energy. TE is trading at $18.09 with a dividend yield of 4.9%. Year to date, TE is down 5.5%. Relative outperformance is a bullish sign of underlying fundamental and technical strength. Looking at recent price action of all companies in this peer group, TE has a gain of 0.95% which ranks 3rd in the utilities. TE had Q4 operating EPS of $0.25, vs. $0.27 a year earlier. Results reflected the impact of very mild weather on the electric and gas utilities, partially offset by higher earnings at TECO Coal and lower fuel and interest costs. TE raised its dividend 2.3% which increases the current yield to 4.9% from 4.8%.
Avista Corporation (AVA) engages in the generation, transmission, and distribution of energy and other energy-related businesses in the United States and Canada. It operates in two segments, Avista Utilities and Advantage IQ. AVA is trading at $24.85 with a dividend yield of 4.67%. Year to date, AVA is down 3.5%. AVA has the 2nd lowest price to book ratio (1.22) in the utility industry. AVA reported net income attributable to Avista Corp. of $100.2 million, or $1.72 per diluted share, for the year ended Dec. 31, 2011, compared to $92.4 million, or $1.65 per diluted share, for the year ended Dec. 31, 2010. For the fourth quarter of 2011, net income attributable to Avista Corp. was $24.6 million, or $0.42 per diluted share, compared to $25.7 million, or $0.45 per diluted share for the fourth quarter of 2010. Ava benefited from above normal snowpack last winter and a cool and wet spring produced excellent river run-off conditions in 2011. This resulted in one of the best hydroelectric generation years on record. In addition, purchased power and natural gas fuel prices were below the level included in base rates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.