In October 2022, we wrote the following:
Utility stocks held up well in 2022 until the last two months. While the broader markets were down 15-20% through August, the utility stock ETF XLU was up slightly. XLU’s outperformance reversed on a dime in September as bond yields rose rapidly. In just the last two months, the 10-year Treasury note yield increased by 1%. XLU fell in sympathy by nearly 20% over the same period.
The 4%+ bond yields for risk-free Treasury securities and 5-6% for high-rated corporate debt are likely tempting traditional investors away from dividend stocks toward less volatile bonds. As such, the price of utilities has fallen, making their dividend yields more competitive with bonds.
If you think bond yields are peaking and likely to decline in the coming months, a bond surrogate like utilities may do very well. Given this outlook, we seek utility companies offering attractive dividends, decent growth potential, lower valuations, and relatively low debt ratios.
Since running that scan, ten-year bond yields fell from 4.25% to 3.25% and then rebounded back to 4.25%. As we share below, utilities generally rose when yields fell and fell when yields rose. Over the last couple of weeks, utilities have been one of the hottest sectors.
Are they foreshadowing lower yields? If so, it’s worth re-running this scan to have a list of strong utilities ready to buy if we get confirmation from the bond market.
Screening Criteria
We considered the following factors when screening:
- Sector = Utilities
- P/E and Forward P/E <20
- Dividend Yield >4%
- LT Debt/Equity <1.5x
- EPS growth next five years >5%
- Debt levels
Company Summaries
Avista Corporation (AVA)
ALLETE, Inc. (ALE)
Portland General Electric (POR)
Xcel Energy (XEL)
Consolidated Edison (ED)
Five for Friday
Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast.
Disclosure
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
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