Roger S. Conrad

The Dow Jones Utility Average hit an all-time high in late June, backed off and is rallying again. The price-weighted index now sells for nearly 22 times trailing 12-months earnings and yields barely 3 percent.

The last time utilities yielded this little was just before the 2007-09 bear market. The only time since the early 1960s the P/E was this high was at the end of 2000, before a nearly 60 percent crash in the wake of Enron’s collapse.

Utility sector business fundamentals have rarely if ever been more secure. That’s the clear message from the break down of my five-part Quality Grade system, which I present in the Utility Report Card. The latest shot in the arm is a steep drop in essential service companies’ borrowing costs.

It’s three and a half years since Kinder Morgan Inc (NYSE: KMI) shocked its investors with a 75 percent dividend cut. And it’s a fair bet many former shareholders are still steering clear. That’s a shame, given the stock’s nearly 40 percent return so far in 2019.

Communications has been a tough business throughout North America for years. But Conservative Holding BCE Inc (TSX: BCE, NYSE: BCE) has consistently gained revenue and market share. The company today operates Canada’s Best in class network on the verge of 5-G adoption.

No stock is a buy at any price. And even the best-run company can get so expensive that realizing additional upside becomes an almost impossible slog. That’s not been the case so far this bull market for the top players in the US utility sector. But if we’re not there yet, we’re getting very close to it.

So far, this has been a very good year to buy and hold utility stocks. The Dow Jones Utility Average including dividends returned 15.4 percent in the first half of the year. Our 2019 picks from the January article did even better with an 18 percent average total return. That beat our pans’ 6 percent return by a 3-to-1 margin.

Buckeye Partners’ (NYSE: BPL) first quarter earnings results had all the hallmarks of a company careening towards another distribution cut. Then Australian private infrastructure fund IFM came along with a $41.50 per unit all-cash takeover offer. That’s given long-suffering unitholders their best opportunity to cash out since early 2018.

Xcel Energy’s (NYSE: XEL) electric utility territory stretches from Minnesota to Texas, running through high-growth Colorado. And with nearly $12 billion in annual revenue and $31 billion market capitalization, its strategic moves are always significant. But getting there depends on more wind power deployment. For that, Xcel will rely on NextEra Energy (NYSE: NEE), its biggest supplier and the leading US producer of wind and solar.

Almost 20 years ago, dysfunctional rules for California’s unregulated power market drove the state’s two biggest electric utilities into bankruptcy and impacted the entire sector. This year, the "inverse condemnation" rule has triggered one bankruptcy filing and may push the state's other electric utilities' ratings toward junk.

Aqua America (NYSE: WTR) is closing in on its proposed acquisition of Pennsylvania-based Peoples Gas, positioning the companies' merger for a late third-quarter close.

Buy American, buy safety and buy yield: Those are three powerful upside drivers for utility stocks this spring, as major sector averages have made one new high after another.

Investors who choose to run with the bulls now, however, should have an extra ounce of caution. Not only are utility stock valuations at levels we haven’t seen since late 2000.

But as I point out in the Feature article, much of the buying power behind the rise doesn’t actually stem from decisions made by individual investors or even money managers. It’s the result of buy signals for algorithms that control vast and growing pools of “passively managed” money.