2 Utility Stocks That May Bring 0% Year-Ahead Total Returns

Includes: SCG, SO, XLU
by: Paul Price

Yield-starved investors have bid up electric utility stocks in their search for the antidote to Bernanke's ZIRP [zero interest rate policy]. Over the past couple of years the XLU Utility ETF has run up about 20.2%, including dividends. Georgia-based Southern Company (NYSE:SO) and South Carolina's SCANA (NYSE:SCG) are now looking pricey, not peachy. Both are likely to revert to more normalized levels over the next year.

How do you recognize excessive exuberance in utility shares? Compare today's P/Es and current yields to those same companies' historical valuations in recent years.

You don't want to be the person paying the highest earnings multiple nor getting the lowest annual dividend. Using actual trading histories avoids the pitfall of trying to decide what a stock should sell for. You simply compare the present-day valuation to what others were paying for the same shares during the five year period 2007 - 2011. That includes both pre- and post-recession valuations.


Aver. P/E

8/20/12 P/E*

Aver. Yield

8/20/12 Yield

Southern Co. @$45.95





SCANA Corp. @ $48.52





* 2012 P/Es based on Zacks estimates for December 31, 2012 source: Value Line

What would these stocks sell for if they merely return to their own normalized valuations?

@ Normalized P/E

@ Typical Yield

Potential Decline*

Southern Co. @ $45.95

15.26x $2.64 est. = $40.29

4.84% yield = $40.50

$5.55 or

(- 12.1%)

SCANA Corp. @ $48.52

13.18x $3.13 est. = $41.25

4.92% yield = $40.24

$7.77 or

(- 16.02%)

* Based on the mid-point of average valuations

Mean reversion would take back almost three years' worth of dividends from holders of Southern Company and close to four year's payouts from SCG's shareholders.

I'm not alone is seeing this. Value Line's total return projections, Morningstar's ratings and Standard & Poors one-year targets look like this:

Unless things go much better than expected, it's unlikely that either SO or SCG will provide decent total returns over the coming year or two. Why not deploy your finite capital into stocks that offer more alluring potential?

The Trades: If you are long SO or SCG they are SELLs

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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