The quest for yield has propelled shares of Oklahoma-based natural gas utility ONEOK (NYSE:OKE) to a nosebleed valuation. It registers 'off the charts' high in absolute P/E, relative P/E and price / book value. Equally disturbing, OKE is offering an all-time low current yield.
Momentum traders love OKE. Stodgy utility investors also love the past performance they have seen since 2009's low. If you don't pay attention to valuation metrics you might love OKE too.
When you view OKE's 3-year chart you will notice that the starting P/E was a quite reasonable 11.7x and the yield was 4.73%. Each successive low saw a higher multiple and a lower dividend yield.
Tuesday closing quote of $46.15 was just pennies off OKE's all-time high of $26.21. The P/E is now 28.1x trailing earnings. The current yield is down to 2.86%. To understand how excessive those are you need to know OKE's past trading history. OKE's current P/E is above the peak multiples of every one of the previous 10 years. It is double to triple the low P/Es in many of those years.
Today's current yield of 2.86% is 21.2% below OKE's own 10-year average yield of 3.63%. At first glance that may not sound as out of line as their P/E is right now. That perception will change when you realize that the payout ratio has expanded by 116.7% (from 34% in 2003 to 73.7% this year) based on consensus estimates for 2012.
Keep in mind, OKE is a moderate growth utility. EPS will have gone up by 24.3% cumulatively in the past four years if they meet their 2012 estimate of $1.79.
Value Line notes that OKE's relative P/E (their own multiple compared to the average stock's P/E) ranged between 0.52x and 0.96x for the full period 1996 - 2010. OKE's 15-year average relative multiple was 0.77x. Today's relative P/E = 1.68x. That's more than double their historical level.
What happens to people who buy or hold grossly overpriced stocks like this? They usually suffer horrible results over long time periods. Note what happened to OKE owners who failed to bail out in 2007 at what were then less lethal valuation metrics than today's.
OKE shareholders watched in horror as their stock dropped by 64.8% from a (split-adjusted) $25.59 to $9.00. Note that the P/E at that top was nowhere near as extended as it is presently. The dividend at that 2007 peak was eerily similar to what's offered today.
Standard and Poors gives its typical mixed message regarding what to do with OKE. They rate it with their highest, 5-Star, BUY ranking while at the same moment telling their subscribers that fair value = $33.60 (with the stock selling for $45.75). How they derived their $50, 12-month price target is beyond my comprehension.
Value Line is more realistic than S&P in making their three - five year assessment. They project a 2015-2017 range of $35 - $50 by then if OKE can grow EPS by 57% or better over the 5 years. OKE was $44.47 when they went to press with their projection. Total return from $46.15 would now be even worse than the unimpressive ones VL showed in that report.
Risk far outweighs any potential reward.
OKE is a strong SELL.