Have Utilities Now Sold Off Too Much?

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Utilities have been loved for years by investors. In many ways, the power-generation companies and electric utilities have replaced traditional CDs and other income-generating investments. The year 2015 is starting out with a very different tone for utility investors. What is very obvious is that institutions and retail investors alike have been exiting the sector for the better part of the past 60 days in order to be out ahead of the coming Federal Reserve’s interest rate hikes.

The question to ask is if the utilities and power-generation giants have sold off too much or whether there will be more pain ahead. Here is an example of just how bad the carnage has been: Of the 12 utilities and generators we follow with market caps in excess of $10 billion, there has been a combined market cap erosion of almost $40 billion.

One new risk has come up with California’s drought. Fitch warned that Governor Brown’s executive order to reduce water usage will lead to lower revenues for the state’s utilities and could pressure a few ratings. The ratings agency did at least signal that many California utilities can mitigate this risk by decoupling revenues from sales.

24/7 Wall St. wanted to look under the hood of the top companies it tracks, specifically Duke Energy Corp. (NYSE: DUK), American Electric Power Co. Inc. (NYSE: AEP), Xcel Energy Inc. (NYSE: XEL), Southern Co. (NYSE: SO), Dominion Resources Inc. (NYSE: D) and PG&E Corp. (NYSE: PCG). The intent was to cover a large footprint in America: the Midwest and central southern states, California and the West Coast, the Northeast and the Southeast. We looked at the performance of the shares by how far down each is from their 52-week high. We also tracked dividend yields, forward earnings estimates, payout ratios, forward price-to-earnings (P/E) ratios and more.

Duke Energy

Duke Energy’s regulated utilities segment operates in the Carolinas, Florida, Ohio, Kentucky and Indiana. This segment owns approximately 50,000 megawatts (MW) of generation and serves approximately 7.3 million retail electric customers in six states in the Southeast and Midwest regions of the United States, with a service area covering approximately 95,000 square miles.

Shares of Duke were down 0.5% at $76.90. Compared to the 52-week trading range of $68.81 to $89.97, shares are down 14.5% from the highs. Duke has an annual dividend of $3.18, a yield of 4.1%. The Thomson Reuters consensus estimates for its earnings per share (EPS) in 2015 and 2016 are $4.67 and $4.96, making the payout ratio 68% and 64%, respectively. The forward P/E ratio for 2015 is 16.5 and it is 15.5 for 2016. Duke has a market cap of $54 billion.

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American Electric Power

American Electric Power delivers electricity to over 5.3 million customers in 11 states, and it also owns the nation’s largest electricity transmission system, with over 40,000 miles in its network. Some of its states covered include Texas, Ohio, Virginia, West Virginia, Tennessee, Indiana, Kentucky and Oklahoma.

Shares of American Electric were trading recently at $55.66, in a 52-week trading range of $49.06 to $65.38. Shares are almost 15% down from the highs. The stock has an annual dividend of $2.12, a yield of 3.8%. The consensus estimate for American Electric’s EPS in 2015 is $3.51 and in 2016 it is $3.69. The payout ratios for 2015 and 2016 are 60.4% and 57.5%, and forward P/E ratios are 15.9 and 15.1, respectively. The company has a market cap of $27 billion.