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-yr 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.
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 5 years >5%
- Debt levels
DUK is the most appealing to us due to its large market cap. Given the passive nature of markets, investors interested in utilities will buy XLU and not individual utility stocks despite some offering better value. As such, the largest utilities within XLU should outperform the sector. DUK is the second largest holding at 7.85% of the ETF.
Company Summaries
ALLETE, Inc. (ALE)
Avista Corporation (AVA)
Duke Energy Corporation (DUK)
Fortis Inc. (FTS)
UGI Corporation (UGI)
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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