Micro Blog #23: What Morningstar has to Say About Utilities and Growing Dividends

Interest sensitive stocks such as the ones in the Utility sector have taken a stumble lately. Many of the blue chip utility stocks are now trading at a relatively lower valuation than what they have been for the past several years (the low interest rate environment).

The transition from low to high interest rate environment has provided an opportunity for dividend or income focused investors to scoop up some of the blue chip names in utilities, especially when they are yielding at historically high levels.

Here is what Morningstar has to say about the current state of Utility sector:

With the rise in interest  rates in the last couple of months, the utilities sector is now open for  stock-pickers. There are several utilities trading at 20% discounts,  but all of them face challenges. We now think on the high-quality side  there are three that offer good value for investors, especially those  looking for dividends.

One of those is Dominion Energy. It trades at a  15% discount to our fair value estimate and a 4.5% yield. With good  growth we think this is an attractive total return, especially with  interest rates still low.


Another high-quality name we think that is  trading at a discount is Duke Energy. It trades at a 10% discount and a  4.5% yield. It's going to have slower growth but still a good total  return for investors.


And finally, Southern Company. It's trading at a  5% yield and a 10% discount to our fair value estimate. It faces some  uncertainties related to a new nuclear program, but we think it will  resolve those and ultimately give investors a solid total return. 


Utilities are known to be slow growers due to their regulated nature, but there are a few names such as D (Dominion Energy) and ED (Consolidated Edison) that have been growing at 10% annual rate (including dividend) for the past 5-years.

D also raised its dividend by 10% and currently has a yield close to its historical 5-year high, which can be a good indicator of a cheaply valued stock.
Source: GuruFocus.com
So, if you are low on utilities in your portfolio, now may be a good time to get some.

Disclosure: I am long D, DUK, ED, PPL, and SO
Disclaimer: As always, do your own due diligence before investing in any stocks mentioned in this post or website.

Comments

  1. Thanks for the info from Morningstar Mr. ATM. It confirms what I have been feeling, thinking and doing by adding to my positions in D and SO during the first quarter of this year.

    I just happened to be here reviewing your objectives and strategy posts from recent days. Have a good Sunday. Tom

    ReplyDelete
    Replies
    1. Yup, you are ahead of the curve my friend :) You too, enjoy your Sunday.

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  2. I have added a lot to my utility positions so far this year. Might as well while the value is there. Own SO, D, and ED from this list. DUK is on my watch/buy list, but probably will hold off on utilities a little bit. Thanks for sharing!

    ReplyDelete
    Replies
    1. Yeah, probably a good idea as another rate hike is looming this week. Utilities could be heading down a bit further. D is down another 2% today. BTW, ED and DUK are my two best performers and still in green while all other utility positions are now in red.

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    2. Yeah ED is my best utility overall. Still up about 15%. Then SO is my only other utility still in green up around 3%. Although I haven't owned it that long so far.

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    3. Daze, I think you picked up SO at the bottom which is great. I am a bit red in SO but don't mind it as my YOC is still over 5%. Thinking about adding more along with some D.

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