It’s been roughly seven months since the Dow Jones Utility Average last made a new high. Since then, it’s underperformed the S&P 500 by nearly 21 percentage points.
Most blame fear of rising interest rates. I fault the manic expectations that pushed prices to unsustainable heights last year. But whatever the catalysts, sector valuations are returning to earth.
What’s remarkable is this is happening despite extremely healthy industry earnings, demonstrated by robust first quarter results. Equally encouraging, regulatory treatment of corporate tax cut savings has so far supported utility balance sheets, as well as rate base and earnings growth, removing a key concern of credit raters.
As the Endangered Dividends List shows, not every essential services company is prospering. But high quality companies that have retreated to good entry points increasingly outnumber the stragglers.
So far this year, we’ve added Comcast Corp (NSDQ: CMCSA) and Edison International (NYSE: EIX) to the Portfolios at their lowest prices since 2016. This month, we’re picking up Sempra Energy (NYSE: SRE). The other Focus stock is Kinder Morgan Inc (NYSE: KMI), which pulled off a major coup in late May by selling its controversial Trans Mountain pipeline to the Canadian government.
Not surprisingly, lower valuations have revived utility sector mergers and acquisitions. My feature article highlights three ways to bet: Arbitrage plays on deals already announced but not yet closed, buying stocks of likely takeover targets and picking up high yield bonds of merger candidates that have much to gain by being acquired.
The seven yieldcos we track in the Utility Report Card are up roughly 5 percent since the February 9 Income Insights. That’s when I highlighted the sector’s bullish reboot, thanks to a mass turnover of sponsors.
A half dozen coverage universe companies have yet to report for Q1, but readers can now check out earnings commentary for 195 other essential services providers, as well as payout ratios, updated advice and Quality Grades in the Utility Report Card.
Another quarter of the companies in our coverage universe have reported calendar first quarter earnings. The Utility Report Card has our updated comments on the results, as well as payout ratios, Quality Grades, trading advice and other information.
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Roger's current take and vital statistics on more than 200 essential-services stocks.