Best-Performing Utility Stocks YTD - June 2019

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Includes: AEP, AGR, APU, BEP, CNP, D, DTE, DUK, ED, EIX, ELP, ENGIY, ES, EVRG, EXC, FE, FTS, JE, LNT, NGG, PEG, PEGI, SO, SPH, SR, TERP, TEZNY, UGI, WEC, XLU
by: BOOX Research
Summary

Article presents returns data for the 50 best performing utilities sector stocks (U.S. and international) year to date.

Utilities as a group have outperformed the broader market over the past year benefiting as a 'defensive sector' amid increasing volatility.

Valuation multiples for various utility stocks at the high-end of their historical trading ranges along with narrowing dividend yields for the group suggest sector is expensive.

Utilities sector stocks have outperformed the broader market over the past year benefiting as a 'defensive sector' amid higher market volatility and emerging concerns over cyclical weakness. The thinking is that during a potential economic downturn, utilities have relatively more stable revenues and earnings given the necessity of the service and structure of long-term contracts. The apparent flight to safety for the group has been coupled with a trend lower in interest rates making utilities sector yields more attractive. The result has been large moves higher in major utility stocks now trading at or near all time highs pushing valuations to the upper ends of their respective trading ranges. This article presents the top performing utility stocks traded on a U.S. exchange along with valuation metrics for the group

Chart Data by YCharts

Utilizing an equity screening database, I filtered for utility sector stocks with a minimum market cap of $500 million traded on a U.S. exchange including international companies. The next step narrowed the universe to only include utilities with at least $100,000 in average daily trading volume over the past month to only identify stocks with meaningful liquidity. 95 stocks came up in the result and the top 50 performers are presented below sorted by year to date return.

Utility Stocks Performance Data

Utilities Sector Stocks Top Performers. Source: Data by YCharts/table author

Brazil's Cia Paranaense De Energia "COPEL" (NYSE: ELP) is the best performing utility stock in 2019 up 59.2%. The performance is even more impressive as the stock is up 162.8% off its 52 weeks lows. The story here has been marked operational and financial turnaround with the company benefiting from some key macro trends in Brazil. COPEL with a market cap of $3.4 billion has returned to profitability following years of loses with management effectively executing non-core asset divestment plan and cost reduction strategy that has improved cash flows and is helping to bring down leverage. Net debt to EBITDA ended Q1 at 2.6x down from 3.1x in 2018. The new Presidential administration in Brazil that has pledged more market friendly policies including power energy deregulation that has supported the sentiment of the power sector in the country. A stronger Brazilian Real currency over the past month has also been a positive.

Regulated gas utility AmeriGas Partners LP (NYSE: APU) has rebounded strongly off its 2018 lows and is up 45% in 2019 but still down 21% from its 52 week highs. In April it was reported that energy sector midstream company UGI Corp (NYSE: UGI) was set merge with APU in a deal valued at $2.44bn.

Brookfield Renewable Partners LP (NYSE: BEP) is another big winner up 35% in 2019. The company owns a portfolio of generation assets across North and South America, India, and China. The company claims its the largest "pure-play" renewable energy business in the world with a market cap of $6.1bn and 17,400 MW of capacity. The company primarily owns hydroelectric facilities but wind and solar are the fastest growing segments.

Canada's small cap Just Energy Group Inc (NYSE: JE) is up 30% year to date. Management recently disclosed the company is undergoing a strategic review for potential M&A transactions. The press releases mentions the goal of the review "is to unlock shareholder value with a view to the best interests of Just Energy and all its stakeholders.” The stock is up 24% in the month of June suggesting the message has been well received by shareholders.

Southern Company (NYSE: SO) makes it into the top 10 up 29% in 2019. The company has an envious record of 71 years of dividends either flat or higher from the prior year. Southern has a major investment pipeline representing $38 billion in projects over the next five years. The company is building the newest nuclear power plant in the U.S. known as Vogtle 3 and Vogtle 4, which has been plagued by delays, but is set for completion by 2021. Management is guiding for EPS growth between 4%-6% through the next five years.

Utility Stocks Valuation Metrics and Dividend Data

Utilities Sector Stocks Valuation Metrics. Source: Data by YCharts/table author

Observing current valuation multiples; the results above are the same stocks as in the previous table but this time sorted by sub-industry. From the original 95 stocks universe of utility stocks, the median average price-to-earnings ratio over the trailing twelve months period is 22x. Notably, independent power producers as a group trade with a higher multiples suggesting more larger growth premium is applied to that sub-industry.

Frothy Valuations

I like to use EV/Revenues 'enterprise value to revenues' as a valuation multiple because it essentially controls for various levels of debt levels between companies and is more stable than earnings or EBITDA based multiples. The chart below highlights the EV/Revenue multiple for some of the large cap names including: Southern Co (SO), Dominion Energy Inc (D), Duke Energy (DUK), Public Service Enterprise Corp (PEG), and Consolidated Edison Inc (ED). These utilities which operate between diversified and regulated utilities industries present EV/Revenue multiples that are at the upper-end of their respective trading ranges going back 10 years. The same pattern is observed in various other utilities stock. One interpretation of this dynamic is that these stocks are more expensive now than at any time his past decade. Investors are paying a higher premium here for the apparent stability of the revenues.

Chart Data by YCharts

Among dividend yields Suburban Propane Partners LP (NYSE: SPH) with a 10.2% yield, AmeriGas Propane Partners LP (APU) 11%, Engie SA (OTCPK:ENGIY) 8.8%, and Pattern Energy Group (NYSE: PEGI) are the highest dividend yields on the list. As a sector, one emerging dynamic is narrowing dividend yields as a result of the strong share price performance in recent years. The trailing-twelve-month yield among major sector ETFs including Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU), and the iShares US Utilities ETF (IDU) highlights the trend in the sector. XLU yielding 2.95%, is under 3% for the first time going back to 2008. This is also an indication that the shares of the underlying utility companies have been aggressively priced and are relatively expensive.

Chart Data by YCharts

Forward Looking Commentary

Considering my view of expensive valuation multiples and tight dividend yields across the Utilities sector, I believe its fair to reduce exposure or wait for a pullback to accumulate shares. The outlook of falling interest rates given dovish signals from the FED is favorable for utilities in that they stay sector yields remain attractive relative to treasuries, however this is balanced by a still uncertain growth environment. In the scenario of a slowdown in economic activity or even in a potential recession, while its likely utilities would outperform the broader equity market, defensive stocks like utilities still face downside to the extent that growth exceptions are pulled back.

Conclusion

Utilities are an integral part of a diversified portfolio often added for the yield characteristics but it's important to remember that price returns can also be significant. I hope the above data serves as a good starting point for further research. While past performance is not indicative of future returns, the performance data of individual stocks often times tells a story that places into context the fundamental developments. Let me know in the comments section which utilities from the list may have more upside, or which ones might be good to sell.

Disclosure: I am/we are long SO, AES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.