As the poster child for low interest rate investing, the utility sector, which used to be reserved for the proverbial orphans and widows portfolios, had quite the run over the past couple of years. Investors desperate for yield invested heavily in the sector and drove some prices to all-time highs. A new report from RBC maintains that sector valuation as relative to the S&P 500 has fallen from around a 15% premium to just 4% today, with much of the move taking place as investors’ expectations of the soon-to-be interest rate increases takes hold.
The RBC team expects more volatility, but at least at this point they have turned more positive on the group after the first quarter sell-off. The analysts are now focusing on deregulated generators and the new yieldcos. Four stocks are considered the “Best Plays” in the sector and are rated Outperform: Abengoa Yield PLC (NASDAQ: ABY), Pattern Energy Group Inc. (NASDAQ: PEGI), Calpine Corp. (NYSE: CPN) and Exelon Corp. (NYSE: EXC).
This total return company owns a diversified portfolio of contracted renewable energy, power generation and electric transmission assets in North America, South America and Europe. The company is focused on providing a predictable and growing quarterly dividend or yield to shareholders. Some on Wall Street see the company’s dividend rising to as high as the 9% range by 2018.
Abengoa investors are paid a 3.12% distribution. The RBC price target for the stock is $44. The Thomson/First Call consensus price target is $39.67. Shares closed Tuesday at $33.78 apiece.
This independent power company with a portfolio of 12 wind power projects has a total owned interest of 1,636 megawatts in the United States, Canada and Chile that use proven, best-in-class technology. Its wind power projects generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business. The company just completed a well-received secondary offering of shares. Analyst around Wall Street see the distribution rising to over 7% by 2018.
Pattern investors are currently paid a sizable 4.8% distribution. The RBC price target is $35, and the consensus target is $33.41. The stock closed on Tuesday at $28.32 a share.
Calpine owns and operates primarily natural gas-fired and geothermal power plants in North America, and it has a significant presence in major competitive wholesale power markets in California, Texas and the Mid-Atlantic region of the United States. The company sells wholesale power, steam, capacity, renewable energy credits and ancillary services to its customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities, power marketers and others.
The RBC price target for the stock, which does not pay a dividend, is $27, and the consensus is posted at $25.54. Shares closed Tuesday at $22.87.
Exelon is the nation’s leading competitive energy provider, with 2014 revenues of approximately $27.4 billion. Headquartered in Chicago, Exelon does business in 48 states, the District of Columbia and Canada. Exelon is one of the largest competitive U.S. power generators, with approximately 32,500 megawatts of owned capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets.
The company’s Constellation business unit provides energy products and services to more than 2.5 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. Exelon’s utilities deliver electricity and natural gas to more than 7.8 million customers in central Maryland, northern Illinois and southeastern Pennsylvania.
Exelon investors are paid a very respectable 3.8% dividend. RBC puts a $39 price target on the stock, and the consensus estimate is posted at $37.86. The stock closed Tuesday at $33.61.
While the utilities string has almost been played out, the RBC take on the yieldcos is a good one. They are expected to raise distributions in the coming years, so that in effect offsets that interest rate risk inherent in most of the sector.