Top-Ranked Utilities Sector Stocks

Aug. 03, 2020 9:00 AM ETNEE, PNW, XEL, PEG, ATO, WEC, AEP, AWR, ED, WTRG56 Comments
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FerdiS
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Summary

  • This article presents the top-ranked dividend growth stocks in the Utilities sector.
  • To rank stocks, I sort them by decreasing quality scores using DVK Quality Snapshots and break ties by comparing up to three additional metrics, in turn.
  • The article includes tables presenting quality indicators, key metrics, and fair value estimates.

We live in interesting times and dividend growth investors will continue to face challenges. As the impact of the COVID-19 pandemic on the global economy plays out, companies will need to adjust to a new "normal." I think that may include slower dividend growth and lower yields, unfortunately.

My approach will continue to favor investing in the highest-quality dividend growth stocks. I identify such stocks using DVK Quality Snapshots. I rank stocks by quality score and consider fair value estimates when looking at candidates for investment.

In April, I presented the three top-ranked dividend growth stocks in each of the GICS sectors. Following a reader's suggestion, I started a new series of articles ranking dividend growth stocks in each GICS sector. Previous articles presented the top-ranked Industrials, Consumer Staples, and Health Care sector stocks.

This article presents the ten top-ranked dividend growth stocks in the Utilities sector.

As a dividend growth investor, I focus on investing in stocks that pay ever-increasing dividends. I use Dividend Radar as my primary watch list of dividend growth stocks. The list and accompanying spreadsheet with fundamental and added value data are updated every Friday and contains stocks with dividend increase streaks of at least five years. You can download the latest copy (dated July 31, 2020) here. The latest list contains 765 stocks, of which 57 are Utilities sector stocks.

The Utilities Sector

The Utilities sector is a defensive sector that offers less volatility than other equities. Utilities are resistant to economic cycles because the demand for utilities does not change much in down cycles.

One reason why Utilities are price-stable is that the government allows them to be monopolies in their respective jurisdictions. This creates a non-competitive and regulated, but stable environment for Utilities to operate in.

Given their stable income base, utility companies pay steady and reliable dividends, often with attractive yields but modest dividend growth rates.

Sector and Performance Comparison

It is quite informative to compare sector averages and the historical performance of sectors over different periods and to see how the Utilities sector compares:

Sources:Dividend Radar (July 31, 2020) • Fidelity Research (July 31, 2020) • Google Finance

The table is color-coded to show the highest (green) and lowest (red) values in each column. Notice that the Utilities sector has the lowest 5-year dividend growth rate [DGR] and Chowder Number [CDN]. On the other hand, the Utilities sector has the lowest volatility in relation to the overall market, as measured by the sector's average 5-year Beta.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Charts created by the author with data from Fidelity Research (July 31, 2020)

The Utilities sector is trailing the performance of the S&P 500 in all time frames. Furthermore, it has performed the worst of all sectors in the past one- and three-month periods.

Quality Assessment

DVK Quality Snapshots provide an elegant and effective way to assess the quality of dividend growth stocks. I use DVK's scoring system but have my own systems to rate and rank dividend growth stocks.

Here are the quality indicators used in determining a stock's quality score:

You can read about these quality indicators by following the provided links.

DVK Quality Snapshots scoring system and my rating system

My rating system maps to quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range 15-25, while Speculative Grade ratings have quality scores below 15 points.

To rank stocks, I sort them by descending quality scores and break ties by considering the following factors in turn:

  1. SSD Dividend Safety Scores
  2. S&P Credit Ratings
  3. Dividend Yield

I rarely need to break ties with Dividend Yield.

Top-Ranked Utilities Sector Stocks

Here are the top 10 dividend growth stocks in the Utilities Sector:

Ranking of Utilities sector stocks (ranks 1-10)

The stocks I own in my DivGro portfolio are highlighted.

The following company descriptions are the author's summaries of company descriptions sourced from finviz.

1. NextEra Energy, Inc. (NEE)

NEE, formerly known as FPL Group, is an electric power company with approximately 42,500 MW of generating capacity in 26 states in the United States and 4 provinces in Canada. The company generates electricity from gas, oil, coal, petroleum coke nuclear, solar, and wind. NEE was founded in 1984 and is based in Juno Beach, Florida.

2. Public Service Enterprise Group Incorporated (PEG)

PEG is an energy holding company with operations in the Northeastern and Mid-Atlantic United States. The company transmits and distributes electricity and natural gas. It operates nuclear, coal, gas, oil-fired, and renewable generation facilities with a generation capacity of about 12,000 megawatts. PEG was founded in 1985 and is headquartered in Newark, New Jersey.

3. Atmos Energy Corporation (ATO)

Founded in 1906 and headquartered in Dallas, Texas, ATO and its subsidiaries are engaged in the distribution, transmission, and storage of natural gas in the United States. The company delivers natural gas to residential, commercial, public authority, and industrial customers in nine states in the southern USA. ATO also operates intrastate gas pipelines in Texas.

4. Pinnacle West Capital Corporation (PNW)

PNW is a holding company that provides retail and wholesale electric services primarily in the state of Arizona. Its subsidiary, Arizona Public Service Company, is a vertically-integrated electric utility that generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. PNW was founded in 1920 and is headquartered in Phoenix, Arizona.

5. WEC Energy Group, Inc. (WEC)

Founded in 1981 and based in Milwaukee, Wisconsin, WEC is an energy company that serves customers in Wisconsin, Illinois, Michigan, and Minnesota. The company's principal utilities are We Energies, Wisconsin Public Service, Peoples Gas, North Shore Gas, Michigan Gas Utilities, and Minnesota Energy Resources. WEC’s subsidiary, We Power, designs, builds and owns electricity generating plants.

6. American Electric Power Company, Inc. (AEP)

AEP is a public utility holding company that engages in the generation, transmission, and distribution of electricity to customers in the United States. The company generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric and other energy sources. AEP was founded in 1906 and is headquartered in Columbus, Ohio.

7. Xcel Energy Inc. (XEL)

Founded in 1909 and based in Minneapolis, Minnesota, XEL is an operating public utility engaged in the generation, transmission, and distribution of electricity and the transportation, storage, and distribution of natural gas. XEL generates electricity from coal, nuclear, natural gas, hydro, solar, biomass, oil and refuse, and wind energy sources.

8. American States Water Company (AWR)

Founded in 1929 and based in San Dimas, California, AWR provides water and electric services to residential and industrial customers in California through a holding company, Golden State Water Company. AWR provides water and wastewater services to military installations in the United States through American States Utility Services, another holding company.

9. Essential Utilities, Inc. (WTRG)

Essential Utilities, Inc., through its subsidiaries, operates regulated utilities that provide water or wastewater services in the United States. The company offers water services through operating and maintenance contracts with municipal authorities and other parties. It also provides non-utility raw water supply services. WTRG was founded in 1886 and is headquartered in Bryn Mawr, Pennsylvania.

10. Consolidated Edison, Inc. (ED)

ED delivers electricity, gas, and steam. The company provides electric services to customers in New York City and Westchester County; gas to customers in Manhattan, the Bronx, and parts of Queens and Westchester County; and steam to customers in parts of Manhattan. ED was founded in 1884 and is based in New York, New York.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

The table includes a column for the Chowder Number (CDN), a popular metric for screening dividend growth stocks for possible investment. The column is color-coded to indicate the likelihood of delivering annualized returns of at least 8%. Green means likely, yellow means less likely, and red means unlikely. I consider green CDNs favorable.

I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.

Sources: Dividend Radar (July 31, 2020) • Value Line Morningstar FASTGraphs Simply Safe Dividends

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

The top 10 are high-quality dividend growth stocks all rated Fine.

ED offers the highest yield (3.98%) and NEE has the highest 5-year dividend growth rate (12.1%). Only three of the top 10 are trading at discounted valuations. PNW is discounted the most, followed by ED and ATO.

None of the stocks have favorable CDNs. As Utilities sector stocks, only those with yields of at least 4% get a special dispensation. But the top 10 all yield less than 4%, so I treat them as other dividend growth stocks: stocks yielding less than 3% require CDNs of at least 15 to be deemed favorable, while those yielding at least 3% need CDNs of at least 12 to be deemed favorable.

I own three of the top 10, NEE, PNW, and XEL, which happens to be the nineteenth home run stock in my DivGro portfolio. Only PNW is a full position (somewhat arbitrarily set at 1% of total portfolio value), so I have scope to add to my NEE and XEL positions... if only they were not overvalued!

Of the stocks I don't own, PEG and AEP with their somewhat higher yields look interesting, and they happen to be trading near fair value. I'm considering selling puts in order to get more favorable entry points.

Below is a chart showing the performance of the 10 top-ranked Utilities sector stocks since February 19 when the S&P 500 closed at a record high. Only NEE is in positive territory, and only NEE and XEL outperformed the S&P 500 over this time frame.

Concluding Remarks

In my view, the best strategy for dividend growth investors in these challenging times is to invest in the highest-quality dividend growth stocks. I identify such stocks using the elegant and DVK Quality Snapshots, which provides an elegant and effective way to assess the quality of dividend stocks.

Few of the 10 top-ranked Utilities sector stocks are trading at discounted valuations. PNW looks most interesting, while PEG and AEP are worth consideration, too.

I hope this article will give dividend growth investors looking to expand their Utilities sector holdings a good starting point for stock selection and further research.

As a bonus, here are tickers of lower-ranked dividend growth stocks in the Utilities sector.

Ranking of Utilities sector stocks (ranks 11-30)

The quality scores of these tickers are 19 (for MSEX through LNT), all Fine stocks, 18 (for SJW through OTTR), and 17 (MDU through SJI), all Decent stocks.

Thanks for reading!

If you have a preference, let me know which sector I should cover next.

This article was written by

FerdiS profile picture
26.27K Followers
FerdiS invests in dividend growth stocks and writes options to boost dividend income. He manages DivGro, a portfolio of mainly dividend growth stocks created in January 2013. With investment and trading experience spanning nearly 20 years, FerdiS enjoys writing articles about dividend growth investing, options trading, stock selection, portfolio management, and passive income generation. His DivGro blog hosts more than 1,000 posts and a live, public spreadsheet with full details of his DivGro portfolio, allowing readers to follow along in his investment journey. FerdiS is collaborating with the founders of Portfolio Insight, an online platform for portfolio management and investment analysis. Together, we maintain and publish Dividend Radar, a free spreadsheet of dividend growth stocks, on a weekly basis.

Disclosure: I am/we are long NEE, PNW, XEL. 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.

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