Only 3 Defensive Utility Stocks Are Considered Cheap With Big Upside
With the stock market’s caution in May giving way to a recovery in June, the major equity indexes are now trading back within striking distance of their all-time highs. Some investors remain quite cautious. With the media reports telling them a recession is brewing and that there are too many sidebar and unconventional risks in the market, it’s no wonder that many investors are looking for cheaper stocks with more predictable earnings, dividend yields and solid operations.
Utilities fit the bill for many investors, and the reality is that dividend investors and those who used to buy certificates of deposit (CDs) have migrated into utilities in the past decade as the only place to make safe money. With a flat to inverted yield curve, these stocks offer attractive dividends versus short-term rates, and they stand to benefit from the lower long-term borrowing costs.
There are currently 28 utilities within the S&P 500, according to a fresh Finviz screen. Shockingly, only three of them fit these criteria:
- Greater than 10% upside to the consensus analyst price target from Refinitiv
- A dividend yield higher than the 10-year and 30-year Treasury yields
- Valued at or under 20 times expected earnings
These three also have operating histories that are more than 100-years old.
Of the 28 utilities, about half of them were trading above their consensus analyst target prices, including American Electric Power, American Water Works, ConEd, NextEra Energy, Southern Company, Sempra and Xcel.
As of June 13, 2019, the yield on the 10-year Treasury was 2.12% and the yield on the 30-year Treasury was 2.61%.
CenterPoint Energy Inc. (NYSE: CNP) is a gas utility with a $14.7 billion market cap. Trading at $29.00, it has a consensus target price of $31.88, and its dividend yield was last seen at 3.9%. The 52-week trading range is $25.65 to $31.42, and the stock is valued at 16 times expected earnings.
The Houston-based utility holding company offers electric transmission and distribution to retail electric providers, municipalities, co-ops and other distribution companies. Its natural gas distribution segment sells regulated intrastate natural gas, offers transportation and storage services, and services residential, commercial, industrial and transportation customers. It also offers energy services for physical natural gas supplies to commercial and industrial customers and more.
Edison International (NYSE: EIX) is an electric utility with a $19 billion market cap. At $59.79 per share, the stock has consensus target price is $71.18 and a dividend yield of 4.1%. It is valued at less than 13 times expected earnings.
The California-based company offers generation, transmission and distribution of electricity. Given where it is based, some investors may fear the curse of PG&E and would take exception that its 52-week range of $45.50 to $71.00 might mean there are more inherent risks for the discounting. Its distribution system is roughly 53,000 line miles of overhead lines and 38,000 line miles of underground lines from 800 substations located in California. Edison International serves approximately 5 million customers.
ONEOK Inc. (NYSE: OKE) is a gas utility with a $27 billion market cap. It trades at $65.05, and its consensus target price is $71.74. The dividend yield was last seen at 5.3%. Its 52-week range is $50.26 to $71.99, and the stock is valued at about 17.5 times expected earnings.
ONEOK is a Tulsa, Oklahoma-based natural gas provider that is into gathering, processing, storage and transportation. It also operates regulated interstate and intrastate natural gas transmission pipelines and natural gas storage facilities, as well as serves exploration and production companies.
Sometimes the valuations in the stock market and the competition of long-term bond yields can make for interesting times for value investors and those who want safety more than they want to be aggressive. With long-term Treasury yields close to multiyear lows again and with a Federal Reserve that is so far not wanting to lower interest rates, this is one time when value investors frequently have to pay up for many of their otherwise go-to stocks.