by Robert Hauver
Is the post-election rally over? Maybe it’s just slowing down, with some investors taking profits, and others adopting a “wait and see” posture, as we head toward next week’s Fed meeting, where it seems more than likely that they’ll raise rates again. There’s also the uncertainty of future policy execution in DC, coupled with the upcoming French and Dutch elections. Suddenly, there’s more for investors to worry about…
In light of this altered landscape, we examined the defensive Utility sector, also well known as having many dividend stocks. It’s represented here by the popular ETF, XLU, which serves as a proxy for the sector on many financial websites.
Even though the S&P has had an impressive gain of 5.69% over the past 3 months, the Utilities ETF has outperformed, rising 8.28%:
Here are XLU’s top 10 holdings – Florida-based Next Era Energy, NEE, is the fund’s largest holding, at 9.45%:
Valuations: This table ranks them by lowest P/E ratio, where electric utility PPL Corp., PPL, leads the pack by a wide margin. It’s interesting to note that PPL is also among the leaders for dividend yield – (see the Dividends table further on in this article for more info).
Performance: The first 4 stocks in this table have outperformed the group average and the S&P 500’s performance year to date in 2017, and also over the past trading month.
As the market has gotten a bit choppier, some Utilities have had more appeal, in spite of the impending advent of rising rates. Edison International, EIX, NEE, and Sempra Energy, SRE, are the 3 top performers in this group so far in 2017, and over the past month.
Dividends: However, those 3 leaders are among the lowest, when ranking by dividend yield. Of course, their yields declined, as their price/share advanced strongly over the past year, from 15% to over 20%.
Note: PPL’s next ex-dividend date is tomorrow, 3/8/17, so we should see it adjust downward for the $.395 quarterly dividend. PPL, NEE, SRE, and EIX have the lowest dividend payout ratios in this group, which speaks to the strength of their earnings, and their conservative cash allocation.
You can track the current prices and dividend yields for several of these stocks in the Utilities section of our High Dividend Stocks By Sectors Tables.
Options: We’ve listed this June call trade for NEE in our free Covered Call Table, which has more details about this and over 25 other call-selling trades. NEE has one $.983 quarterly dividend due during the term of this trade. The June $135.00 call strike has a bid of $2.00, about 2x the amount of the next dividend.
You can also track a June NEE put option trade, in our Cash Secured Puts Table, where we track over 25 other income-producing, put-selling trades.
Price Targets: As income and value investors, we’re always faced with the same conundrum – which do you favor more – dividend stocks with an attractive dividend yield, vs. finding undervalued stocks.
As this table illustrates, these stocks are all either close to or above their consensus price targets right now – analysts upward price revisions haven’t kept up with the price advances of this group. This makes sense, given that higher rates will create higher operating expenses for these capital equipment-heavy companies.
Financials: The relative debt loads for these companies shows that the 4 performance leaders, EIX, NEE, SRE, and PCG, all have Debt/Equity loads which are lower than the average for this group. Even if rates aren’t going to rise to much higher levels, the market is rewarding lower debt loads in this sector.
Disclosure: Author held no shares of any of the stocks mentioned in this article at the time of publishing.
Disclaimer: This article is written for informational purposes only, and isn’t intended as personal investment advice.
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