Energy utilities provide individuals and businesses with a growing necessity, often at government-regulated prices, and with restricted competition. Due to significant government regulations, set prices and the ever-expanding need for electricity, energy utility equities are considered generally reliable, stable and often somewhat predicable. Though few expect utilities to appreciate considerably in a short time, most will acknowledge that the demand for electricity will increase as the use of technology and electricity grows, and as the population grows.
The regulated nature of energy utilities makes their revenue more predictable and dividends reasonably secure. The relative security these utilities offer also means that the dividends and shares are unlikely to grow at a rapid pace. Nonetheless, utilities can outperform the broader market, and actually did in 2011. Generally speaking, utilities are lower risk and lower reward equities compared with the broader market. They also tend to yield above the market's average, making them more appealing to investors seeking income.
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. Another reason is likely because the utilities sector thoroughly outperformed the broader market, and many investors might have simply chosen to take some utility-based profits and re-allocate them into one of the poorer performing sectors in 2011.
Below are performance rates for six large-cap (over $10 billion) utilities within the S&P 500 that have a current yield of at least 4.6%: American Electric Power (AEP), Duke Energy (DUK), Entergy Corp. (ETR), Excelon Corp. (EXC) FirstEnergy Corp. (FE), and PPL Corp. (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 recent performance chart for the SPDR Utilities ETF (XLU):
(Click 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. The sector spiked down at the start of 2012 and has since been relatively range-bound.
Recently, though, the markets have come under pressure and interest rates have again approached record lows. These are the same basic characteristics that contributed to the utilities sector's outperformance during 2011, and which could help propel utilities higher in the coming months. Despite this recent strength, most utilities are still down so far in 2012, as well as over the last six months. Additionally, half of the above-listed utilities are down from where they were one year ago.
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 period or becomes range bound, after several months of broad market appreciation to start off the year.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
