Energy utilities are providers of a growing necessity, and often at government-regulated prices and with restricted competition. Because of significant government regulations, set prices and the growing need for electricity, energy utility equities are considered generally reliable, stable and somewhat predicable businesses. Further, the demand for energy is largely expected to increase as the population increases, and as the use of technology and electricity grows.
The regulated nature of energy utilities makes their dividends reasonably secure, and also designates the equities as classic "widow and orphan" stocks. The relative security these utilities offer also means that the dividends and equity are unlikely to grow at a rapid pace, though utilities can outperform the broader market, and did in 2011. Generally speaking, utilities are lower risk and lower reward equities compared with the broader market.
Many utilities stalled at the start of 2012, and have since underperformed the broader market. Some of this underperformance may be due to investors fearing that bond yields may soon rise, and that energy utilities may depreciate due to their common use as a bond alternative and/or other fixed income investment supplement.
Below are performance rates for six large-cap (over $10 billion) utilities within the S&P 500 (NYSEARCA:SPY) that have a current yield of at least 4.8 percent: American Electric Power (NYSE:AEP), Duke Energy (NYSE:DUK), Entergy Corp. (NYSE:ETR), Excelon Corp. (NYSE:EXC) FirstEnergy Corp. (NYSE:FE), and PPL Corp. (NYSE:PPL). I included their one-month, 2012-to-date and six-month equity performance rates (not including dividends paid). I have also provided their current yields.
And below is a 6-month performance comparison chart for these six equities:
(Click chart to enlarge)
In 2011, most utilities experienced strong performance during the first three quarters of the year, followed by a good deal of weakness among the group at the end of 2011 and into 2012. This may indicate a possible market rotation into higher growth sectors that are less likely to suffer significant declines if Treasury yields spike up.
So far in 2012, the above-listed equities are down an average of 4.64 percent, compared with a broadly positive market as defined by the S&P 500, which is up about 12.3 percent since the year began. This weakness by utilities appears somewhat normal and expected, given the strength the group exhibited last year, but it should also be expected that dividend-seeking investors may eventually return to well-priced utilities, some of which now offer a yield at or above 5 percent, or over double the yield of the S&P 500 or a 10 year Treasury.
Investors looking to double their money in the next year or two are unlikely to look at utilities, but those looking for current income and the potential for slow and steady growth may appreciate these large and regulated businesses. Utilities are also generally far less volatile than the broader market, which could be a good thing for utility investors if the market soon undergoes a correction or cooling off period.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.