According to the U.S. Department of Labor, the Producer Price Index declined 0.4 percent in April — the fifth decrease in the past six months, and a decline of 1.3 percent over the past 12 months. With these numbers clearly falling short of the Federal Reserve’s stated inflation targets, many market watchers are cautiously optimistic that any Fed rate hikes will be further off than earlier believed.
One stock market sector closely tied to interest rates is utilities. With historically high dividend yields, utilities stocks compete with bonds and other interest-bearing securities for income-seeking investors. Any prolonged delay in interest rates should be beneficial to the utilities sector.
Furthermore, the utilities sector is looking oversold compared with some other U.S. sectors. For much of 2015, the Dow Jones Utilities Average traded below its 50-day moving average and has only recently crossed above it. Reversion to mean trading strategies would suggest that the utilities sector may outperform other sectors in the intermediate term.
The screen. We used Recognia Strategy Builder to search for U.S. utilities stocks with manageable debt levels, good dividend yields and reasonable forward valuations. We began by setting a minimum market capitalization threshold of $10 billion. We searched for larger and more stable companies in the market.
Strong and stable dividend yields are a significant attraction of utilities stocks. Therefore, we screened for stocks with indicated annual dividend yields of at least 3 percent. We also wish to stay away from companies with excessive debt, so we focused on companies with debt-to-equity ratios of 1.5 or less. Finally, to ensure we don’t overpay for our investments, we screened for companies with reasonable forward price-to-earnings ratios based on analyst estimates. We selected only companies with forward P/E ratios of 18 or less. Here are the results.
Entergy Corporation, headquartered in New Orleans, ranks No. 1 on our screen. The company is primarily involved in electric power generation and distribution services in the southern U.S. states. Entergy has an attractive 4.4 percent dividend yield and a $13.3 billion market capitalization. Like many utilities, the company’s stock price has suffered over the past few months, and is down over 16 percent so far this year. As a result, the company’s forward P/E ratio is a very reasonable 12.6 — the lowest of any company on our list.
Southern Company is an electric utility holding company based in Atlanta. It is one of the largest producers of electricity in the U.S. and holds a number of electric operating companies as well as some telecom assets. The company has the highest dividend yield on our list at 5 percent, as well as a very reasonable forward P/E of 15.6. On April 29, the company report first-quarter results, which narrowly missed analyst expectations on both earnings and revenue.
Public Service Enterprise Group is a diversified energy company based in Newark, New Jersey. It is the largest provider of natural gas and electric services in the state. It has a 3.7 percent dividend yield, a 15.6 forward P/E ratio and the lowest debt-to-equity ratio on our list at 0.75. Unlike much of the rest of the U.S. utility sector, this company has bucked the trend and recorded a very good one-year stock market return of 14.4 percent.
Duke Energy Corporation of Charlotte, North Carolina, is the largest company on our list with a market cap of $52.2 billion. Duke is also the largest electric power holding company in the U.S., with operations in many states as well as in Canada and Latin America. Duke Energy has an attractive 4.2 percent dividend yield and a 16.4 forward P/E ratio. The company reported first-quarter results on May 1, which surpassed analyst expectations on earnings but disappointed somewhat on revenue.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described in this article had a 13.9 percent annualized return, compared with 13.3 percent for the Standard & Poor’s 500 index and 11.4 percent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Oversold Utilities Stocks originally appeared on usnews.com