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Utility stocks were the rage in July when investors feared a double-dip recession. But, in anticipation of the second round of quantitative easing, dividend-payers have lagged behind riskier stocks. Utilities currently comprise the cheapest U.S. sector based on earnings expectations. They also represent the most inexpensive subset of the S&P 500 despite yielding more than U.S. 10-year Treasury bonds. Here are the 10 cheapest large-cap utility stocks, ordered from cheap to cheapest. (All figures in U.S. currency)
10. Edison International sells electricity in coastal and southern California. Its third-quarter profit increased 27 per cent to $510-million, or $1.57 a share, as revenue grew 3.4per cent. The operating margin widened from 21 per cent to 23 per cent. Edison has $2-billion of cash and $12-billion of debt. Its stock trades at a trailing earnings multiple of 9.5, a forward earnings multiple of 12, a book value multiple of 1.1 and a cash flow multiple of 3.3, 34 per cent, 5 per cent, 32 per cent and 39 per cent discounts to utility peer averages. Half of the analysts covering Edison rate it "buy" and half rate it "hold."
Dividend Growth: Edison pays a dividend yield of 3.3 per cent with a payout ratio of 32 per cent. It has a three-year dividend growth rate of 2.8 per cent and five-year growth of 4.7 per cent.
Bullish Scenario: RBC Capital Markets expects Edison's stock to advance 19 per cent to $45.
Bearish Scenario: Citigroup values Edison's stock at $33, implying it is 15 per cent above fair value.
9. Teco Energy Inc. generates, purchases and sells electricity in Florida. It also sells natural gas. Its third-quarter profit decreased 21 per cent to $51-million, or 24 cents a share, as revenue inched up 0.6per cent. The operating margin declined from 18 per cent to 17per cent. Teco has $166-million of cash and $3.4-billion of debt. Its stock sells for a forward earnings multiple of 12, a book value multiple of 1.7 and a cash flow multiple of 4.7, 13 per cent, 12 per cent and 24 per cent discounts to multi-utility averages. Of analysts following Teco, six rate it "buy", 11 rate it "hold" and two rank it "sell.
Dividend Growth: Teco offers a dividend yield of 4.8 per cent with a payout ratio of 75 per cent. It has a three-year dividend growth rate of 1.7 per cent and a five-year growth rate of 1.4 per cent.
Bullish Scenario: FBR Capital Markets predicts that Teco's stock will rise 5 per cent in to $18.
Bearish Scenario: Deutsche Bank offers a target of $15.50, suggesting 9 per cent downside.
8. NextEra Energy Inc. , formerly FPL Group, operates the third-largest nuclear power-generation fleet in the U.S. It also generates electricity using wind and solar power. Its third-quarter profit gained 35 per cent to $721-million, or $1.74 a share, as revenue ascended 4.9 per cent to $4.7-billion. The operating margin extended from 19 per cent to 24 per cent. NextEra's stock trades at a book value multiple of 1.6, a sales multiple of 1.4 and a cash flow multiple of 5.7, on par with utility averages. Still, 15 analysts rate its stock "buy" and eight rate it "hold." No analysts rank its shares "sell."
Dividend Growth: NextEra pays a dividend yield of 3.7 per cent with a payout ratio of 40 per cent. It has a three-year dividend growth rate of 7.1 per cent and a five-year growth rate of 7 per cent.
Bullish Scenario: JPMorgan forecasts that NextEra's stock will climb 19 per cent to $64.
Bearish Scenario: Sanford Bernstein values NextEra at $51, implying 5 per cent downside.
7. American Electric Power generates electricity using coal, natural has, nuclear and hydroelectric sources. Its third-quarter profit expanded 25 per cent to $556-million, or $1.16 a share, as revenue increased 15 per cent to $4.1-billion. The operating margin stretched from 24per cent to 25per cent. American Electric has $1.4-billion of cash and $19-billion of debt. Its stock sells for a forward earnings multiple of 12 and a book value multiple of 1.3, 11 per cent and 18 per cent discounts to peer averages. Of analysts following the stock, 12 rate it "buy" and nine rate it "hold." None rank it "sell."
Dividend Growth: American Electric Power offers a dividend yield of 5 per cent with a payout ratio of 64 per cent. The stock has a three-year dividend growth rate of 2.7 per cent and a five-year dividend growth rate of 3.8 per cent.
Bullish Scenario: JPMorgan expects American Electric's stock to appreciate 21 per cent to $44.
Bearish Scenario: UBS offers a target of $37, suggesting the stock is just below fair value.
6. FirstEnergy Corp. owns a variety of regulated and unregulated electric utilities. Its third-quarter profit tumbled 24 per cent to $179-million, or 59 cents a share, as revenue gained 8.4 per cent. The operating margin extended from 15 per cent to 20 per cent. FirstEnergy has $632-million of cash and $15-billion of debt. Its stock trades at a forward earnings multiple of 11, a book value multiple of 1.2, a sales multiple of 0.8 and a cash flow multiple of 3.5, 13 per cent, 21 per cent, 40 per cent and 35 per cent discounts to industry averages. Just three analysts rate it "buy" while eight rate it "hold" and two rank the shares "sell."
Dividend Growth: FirstEnergy pays a dividend yield of 6.2 per cent with a payout ratio of 80 per cent. It has a three-year dividend growth rate of 3.2 per cent and five-year growth of 5.7 per cent.
Bullish Scenario: Sanford Bernstein predicts that FirstEnergy's stock will advance 37 per cent to $49.
Bearish Scenario: Jefferies values FirstEnergy at $30.50, suggesting that it will decline 15 per cent.
5. Entergy Corp. is an integrated energy company that owns and operates power plants and nuclear-power generators. Its third-quarter net income rose 8.2 per cent to $498-million, but earnings per share jumped 13per cent to $2.62. Revenue stretched 13 per cent to $3.3-billion. The operating margin contracted from 28 per cent to 23 per cent. Entergy's stock sells for a trailing earnings multiple of 10, a forward earnings multiple of 11 and a cash flow multiple of 3.2, 28 per cent, 16 per cent and 40 per cent discounts to utility peer averages. Seven researchers advise purchasing the stock and 13 advise holding it.
Dividend Growth: Entergy offers a dividend yield of 4.6 per cent with a payout ratio of 46 per cent. Its stock has a three-year dividend growth rate of 7.9 per cent and a five-year dividend growth rate of 8.5 per cent.
Bullish Scenario: BMO Capital Markets forecasts that Entergy's stock will climb 26 per cent to $92.
Bearish Scenario: Citigroup offers a target of $72, implying that the stock has passed fair value.
4. Public Service Enterprise Group sells electricity and natural gas in the Northeast and Mid-Atlantic regions. Its third-quarter profit increased 16 per cent to $567-million, or $1.12 a share, as revenue gained 7.1 per cent. The operating margin widened from 30 per cent to 31 per cent. Public Service Enterprise's stock trades at a trailing earnings multiple of 9.8, a forward earnings multiple of 11 and a book value multiple of 1.7, 33 per cent, 21 per cent and 13 per cent discounts to multi-utility averages. Of analysts covering Public Service, 13 rate its stock "buy" and five rate it "hold." Just one analyst ranks it "sell."
Dividend Growth: Public Service Enterprise pays a dividend yield of 4.3 per cent with a payout ratio of 42 per cent. It has a three-year dividend growth rate of 5.4 per cent and a five-year dividend growth rate of 4.1 per cent.
Bullish Scenario: Jefferies expects Public Service's stock to climb 17 per cent to $37.50 in 12 months.
Bearish Scenario: Barclays values the stock at $32, suggesting that is trading at fair value.
3. PPL Corp. is an electric utility in the U.S. and U.K. Its third-quarter profit multiplied to $248-million, or 62 cents a share, hurt by special item charges in the year-ago quarter. Revenue increased 22 per cent to $2.2-billion. The operating margin rose from 9.6 per cent to 26 per cent. PPL has $4.9-billion of cash and $9-billion of debt. Its stock sells for a forward earnings multiple of 10, a 23 per cent discount to its peer average. It's fairly valued based on book value and cash flow. Of researchers following PPL, six advocate purchasing its shares and nine recommend holding them. None say to sell.
Dividend Growth: PPL offers a dividend yield of 5.4 per cent with a payout ratio of 76 per cent. It has a three-year dividend growth rate of 5.4 per cent and five-year growth of 8.8 per cent.
Bullish Scenario: Jefferies predicts that PPL's stock will gain 15 per cent to $30 in the next 12 months.
Bearish Scenario: Deutsche Bank offers a target of $27, suggesting the stock is nearing fair value.
2. Exelon Corp. is a utility-services holding company, with subsidiaries operating in Illinois. Its third-quarter profit extended 12 per cent to $845-million, or $1.27 a share, as revenue increased 22 per cent to $5.3-billion. The operating margin narrowed from 33 per cent to 27 per cent. Exelon's stock trades at a trailing earnings multiple of 10, a forward earnings multiple of 9.8 and a cash flow multiple of 4.8, 29 per cent, 24 per cent and 12 per cent discounts to electric utility industry averages. Of researchers covering Exelon, five rate its stock "buy", 13 rate it "hold" and three rank the shares "sell."
Dividend Growth: Exelon pays a dividend yield of 5.2 per cent with a payout ratio of 54 per cent. It has a three-year dividend growth rate of 6.1 per cent and five-year growth of 5.6 per cent.
Bullish Scenario: RBC Capital Markets forecasts that Exelon's stock will rally 47 per cent to $59.
Bearish Scenario: Macquarie values Exelon at $39, implying that the stock has surpassed fair value.
1. Constellation Energy Group is a power generator with wholesale marketing and risk management operations. It swung to a third-quarter loss of $1.4-billion, or $6.99 a share, from a profit of $167-million, or 69 cents, a year earlier. Revenue declined 1.5 per cent to $4-billion. The operating margin turned negative. Constellation has $1.4-billion of cash and $4.3-billion of debt. Its stock sells for a forward earnings multiple of 8.5, a book value multiple of 0.8 and a sales multiple of 0.4, 72 per cent, 56 per cent and 74 per cent discounts to peer averages. Just 19 per cent of analysts rate the stock "buy."
Dividend Growth: Constellation offers a dividend yield of 3.3per cent with a payout ratio of 6per cent, affected by one-time gains. Its quarterly dividend has fallen from a high of 48 cents in 2009 to 24 cents.
Bullish Scenario: Jefferies predicts that Constellation's stock will rally 38per cent to $40 in the next year.
Bearish Scenario: Barclays expects Constellation's stock to stagnate at $29 for 12 months.