In Over-Priced Utilities, Two Cheap-ish Div Champs

YCharts

This is part three of a YCharts series analyzing dividend-payers across all 10 sectors of the S&P 500. The first and second in our series are here and here.

Once the dowdy sector of choice for conservative widow and orphan accounts, utilities are suffering from a bout of popularity. The sector rose 11.8% in the first quarter; you know you’re in a funky economy when four years into an economic recovery one of the strongest sectors is the slowest grower. S&P Capital IQ forecasts an operating earnings gain of 0.6% in 2013 for this segment of the S&P 500 -- compared to 7.4% for the overall index -- yet it continues to trade at an above market price earnings multiple. The utility sector’s estimated 16.2 PE for 2013 is about 15% higher than the average overall S&P 500.

Not exactly a recipe for finding value.

In terms of current yield, a 2% hurdle is Lilliputian for S&P 500 utility constituents. What’s harder to come by is the right mix of dividend growth -- at least 3% annualized over the past five years -- and a below average forward PE ratio.

PPL (PPL) and Entergy (ETR) are the two most compelling standouts with current dividend yields more than double the market average and payout ratios that are rock bottom for the sector, where 75% or higher is common.

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PPL Dividend Yield Chart

With forward PE ratios below 14, both PPL and Entergy are well below the 16.2 average for the sector, and a lot cheaper than utility big boys such as Duke Energy (DUK), PG&E (PCG) and Consolidated Edison (ED).

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PPL Forward PE Ratio Chart

The forward PE’s for PPL and Entergy are also below the forecasted 14 PE for the entire S&P 500. Given the sector’s slow growth profile, a below-market valuation should be common. These days amid the clamor for yield, defensive sectors have been bid way up. PPL and Entergy are rare birds that deliver high income without a high valuation.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.


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