Well, it was good while it lasted, and boy did it ever. In the past five years the Dow Jones Utility Index is up a stunning 65%, and if you add the stock price gains with the dividends, it is probably one of the greatest total return trades of the past 20 years. But like all good things, this long run is probably close to over, and with the specter of rising rates coming eventually, many shares are fully valued.
In a new research report, while Deutsche Bank focuses more on the upcoming PJM auction, one thing seems very clear in their universe coverage of the sector: only a few stocks are still a good value at current levels. They do have three rated Buy for investors still seeking a safer path.
American Electric Power
This industry leader is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
Many on Wall Street feel that the stock trades at a discount to its utility peers and they feel it deserves a premium. They also think the company may sell generating assets and buy back shares with the proceeds, which will be accretive.
American Electric Power shareholders receive a solid 3.55% dividend. The Deutsche Bank price objective for the stock is $66. The Thomson/First Call consensus target is $67.47. Shares closed on Wednesday at $63.30.
This is another solid pick for investors not needing dividend income. Dynegy Inc. (NYSE: DYN) operates in three segments: Coal, IPH and Gas. The company sells its services on a wholesale basis from its power-generation facilities. It has a fleet of 35 power plants in eight states, totaling approximately 26,000 megawatts of generating capacity.
The company serves a range of customers, including regional transmission organizations, independent system operators, integrated utilities, municipalities, electric cooperatives, transmission and distribution utilities and power marketers, as well as financial participants, such as banks and hedge funds, and residential, commercial and industrial end-users.
Dynegy currently does not pay a dividend. Deutsche Bank has a $21 price target, which is below the consensus target of $23.31. Shares closed on Wednesday at $18.29.
This company was obliterated last year, and although it has made a nice run off the lows, it may hold solid upside for aggressive accounts. NRG Energy Inc. (NYSE: NRG) is leading a self-described customer-driven change in the U.S. energy industry by delivering cleaner and smarter energy choices, while building on the strength of the nation’s largest and most diverse competitive power portfolio.
The company creates value through reliable and efficient conventional generation while driving innovation in solar and renewable power, electric vehicle ecosystems, carbon capture technology and customer-centric energy solutions. The company’s retail electricity providers serve almost 3 million residential and commercial customers throughout the country.
In a recent 13G filing with the U.S. Securities and Exchange Commission (SEC), Viking Capital reported the acquisition of 6.34 million common shares of Dynegy. That currently accounts for 5.4% of the company’s outstanding stock and represents a new addition to Viking Capital’s equity portfolio.
NRG investors are paid a 0.77% dividend. The $19 Deutsche Bank price target is less than the consensus target of $23.31. The stock closed Wednesday at $15.31 per share.
The utility trade isn’t over, and an allocation is always suitable for long-term buy-and-hold accounts. The big money has been made, and a lot of the faster institutional money is moving out, it would appear.