Energy utilities provide individuals and businesses with the growing necessity of electricity, generally at government-regulated prices and with restricted competition. Due to significant government regulations, set energy prices and the ever-expanding need for electricity to power increasing aspects of our lives, energy utility equities are considered generally reliable, stable and somewhat predicable.
Few predict utilities to appreciate considerably in a short period, but most agree that the demand for electricity will increase as the use of technology and electricity grows, and as the population grows. Moreover, 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, but they do tend to grow and they are already generally far higher than the average equity yield.
Beyond their safety and income generation, utilities can sometimes outperform the broader market strictly as equity vehicles held for capital appreciation. Most U.S. energy utilities outperformed the broader market in 2011, largely due to similar conditions to those currently affecting the markets. Generally speaking, utilities are lower risk and lower reward equities compared with the broader market, meaning that they often outperform the broader market during periods of weakness, as investors flee to investments they perceive as safer.
Many utilities stalled at the start of 2012, and subsequently underperformed the broader market's Q1 move. Some of this underperformance may be due the utilities sector's outperformed in 2011, prompting some investors to take profits and re-allocate the funds into another sector.
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), Exelon Corp. (EXC) FirstEnergy Corp. (FE), and PPL Corp. (PPL). I included their one-month, 3-month and 2012-to-date 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):
Recently, the markets have come under pressure and interest rates have again reached 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. Many utilities are still down so far in 2012, as well as over the last three months and one month terms, but over the last month, these utilities average flat performance, versus about a 7 percent decline by the S&P 500. These utilities also have an average yield of five percent, versus about two percent for the benchmark.
Investors looking to double their money in the next year or two are unlikely to look at utilities, but those looking for reasonably stable present income and the potential for slow but steady growth may appreciate these widow and orphan stocks.
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.