Benefits Of Owning Utilities

Includes: AEP, DUK, ED, EXC
by: Bear Fight

Despite the year-to-date underperformance to the broader market, there are significant benefits to owning utilities in your portfolio. I think investors should stick with utilities due to their strong dividend yields and the potential for outperformance in a risk-off market. The markets experienced a strong rally in the first quarter of 2012 and I think it would be prudent to reduce risk in your portfolio. The markets have showed signs of fatigue after a strong run and renewed fears from Europe. The safety and strong dividend yields should provide investors with a strong sector to hideout in during a prolonged sell-off.

Investors who have flocked to dividend-yielding equities have been treated to underperformance in early 2012. As the 10-year Treasury remains at a paltry 2.0%, investors have sought yield from equities including utilities. The equities below are large-capitalization U.S. equities that yield over 2.0% and trade at modest price-to-earnings ratios.

Investors have sought dividend-yielding utilities due to their steady, non-cyclical business models. Utilities operate pseudo monopoly businesses within their respective territories. Investors have been punished in the risk-on rally.

Benefits of Investing in Utilities:

  1. Current income from strong and stable dividends
  2. Low volatility (beta is less than 1.0)
  3. Provides inflation hedge due to rate increases

Outlined below are large utilities and the investment rationale. These utilities trade at modest multiples of earnings and provide significant dividend yields for income seeking investors.

American Electric Power Co. (NYSE:AEP)

Market Capitalization: $18.3 billion

Price to Earnings: 11.7x

Dividend Yield: 4.9%

Beta: 0.49x

Rationale: Operates a diversified business model from different states, which insulates the company from changes in any one territory. The company is expecting an rate increase in 2012, which will bolster cash flow.

Duke Energy Corporation (NYSE:DUK)

Market Capitalization: $27.7 billion

Price to Earnings: 16.2x

Dividend Yield: 4.8%

Beta: 0.36x

Rationale: The company operates in favorable geographies including North and South Carolina. In addition, the company has a strong international business.

Consolidated Edison Inc. (NYSE:ED)

Market Capitalization: $17.0 billion

Price to Earnings: 16.3x

Dividend Yield: 4.2%

Beta: 0.24x

Rationale: The company has a long operating history of raising its dividend for over 38 years. The company's infrastructure is vast, which will allow the company to collect high rates.

Exelon Corporation (NYSE:EXC)

Market Capitalization: $32.6 billion

Price to Earnings: 10.2x

Dividend Yield: 5.5%

Beta: 0.56x

Rationale: The company operates low-cost nuclear power plants.

Disclosure: I am long AEP.