|Bid||0.00 x 1000|
|Ask||0.00 x 1300|
|Day's Range||52.09 - 52.47|
|52 Week Range||47.37 - 57.23|
|PE Ratio (TTM)||8.59|
|Expense Ratio (net)||0.14%|
The biggest utility by market cap, NextEra Energy (NEE) stock has an estimated upside of almost 5.0% based on analysts’ median price target of $178.9 and its current price of $170.8. On September 21, Morgan Stanley cut NextEra Energy’s target price from $186.0 to $184.0.
In this article, we’ll take a look at these California utilities’ free cash flows. Notably, none of the three top California utilities have generated positive free cash flows in the last few years. Free cash flow is generally calculated as the difference between operating cash flow and capital expenditure. It’s a vital metric to use in measuring utilities’ performances, as free cash flows are used for dividend payments and expansions.
Let’s take a look at the utility sector’s total returns compared to those of other sectors so far this year. Broader utilities (XLU) have returned more than 3% this year, underperforming the broader markets. SPY, a representative of the broader markets, continues to make new highs and has returned 11% this year.
In this article, we’ll take a look at the valuations of California utility stocks. Sempra Energy (SRE), the largest of them all by market cap, is currently trading at a forward PE (price-to-earnings) ratio of above 19x. Sempra Energy is one of the fastest-growing utilities in the industry. Its five-year average historical valuation is around 20x.
Since inception almost two decades ago, the Global Industry Classification System (GICS) has been the standard taxonomy employed by the financial community to sort business entities by sector and industry group. Changes to this taxonomy, no matter how small, can have a significant impact on how companies are classified and which enterprises are included in sector index and index products developed by Standard and Poor’s and MSCI. Understanding how these changes impact company and industry groupings is therefore critical for investors with exposure to ETFs. In January 2018, S&P Dow Jones Indices, a division of S&P Global, introduced several revisions to the GICS structure. These changes, which will be implemented after the close of business on Sept. 28, 2018, impact three specific sectors: Telecommunications Consumer discretionary Information technology The MSCI Equity Indexes will reflect these changes as part of its semi-annual index review in November 2018. Discover ETFs based on the sector of your choice from here. From here you can even explore different sector-focused ETFs based on their power rankings – a unique way to view rankings of various ETF sub-groups (eg. sectors) based on powerful metrics like three-month fund flows, average three-month return or average dividend yield.
Southern Company (SO) expects to increase its EPS by 4%–6% annually for the next few years, which is in line with the industry average. Southern Company’s stock performance has been negatively affected by power plant issues in the last few years.
On September 21, the Utilities Select Sector SPDR ETF (XLU) had an implied volatility of 13%, marginally higher than its 15-day average. A stock’s implied volatility represents investors’ unease. Rising volatility is generally related to a fall in a stock’s price.
On September 21, the implied volatility in FirstEnergy (FE) stock was close to 16%—near its 15-day average. The implied volatility was notably higher than broader utilities and broader markets. A higher implied volatility shows more investor anxiety. Higher implied volatility is usually associated with a fall in the stock and vice versa.
At the end of Q2 2018, PG&E (PCG) had net debt of $18.7 billion, while Sempra Energy (SRE) had net debt of $25.8 billion. Sempra Energy’s debt has significantly increased in the last couple of quarters due in part to its Oncor acquisition. Edison International’s (EIX) debt was $14.5 billion as of June 30. Utilities generally have a large amount of debt on their books because of their heavy capex needs.
PPL’s payout ratio was 75% in the last 12 months, which was higher than its five-year average payout ratio of 65%. During the same time, Southern Company’s (SO) payout ratio was 76%. A payout ratio indicates a portion of a company’s profits distributed to shareholders in the form of dividends.
Southern Company (SO), the second-largest regulated utility, is expected to grow its EPS by 4%–6% per year for the next few years. Wall Street analysts expect its dividends to grow around 3% for the next few years. Utilities at large are aiming for 4%–6% per share dividend growth for the next few years. In comparison, PPL’s (PPL) EPS growth could remain at 5%–6% through 2020, and it expects its dividends to grow by 4% for the next few years.
NextEra Energy (NEE), the biggest component of the Utilities Select Sector SPDR ETF (XLU), has rallied more than 10% so far this year. It has significantly outperformed its peers in the last few years.
With notable weakness last week, the Utilities Select Sector SPDR ETF (XLU) has fallen below its 50-day moving average level. Its 200-day moving average level of ~$51.2 is likely to act as a vital support for it in the short term. XLU closed at $53.06 last week.
US utility stocks recently saw fresh weakness brewing as Treasury yields touched new highs. However, trade war anxieties in the broader markets could make utilities attractive again. Investors turn to relatively safe utilities given their superior yields during times of uncertainty. Let’s take a look at top-yielding utility stocks Southern Company (SO) and PPL Corporation (PPL).
FirstEnergy (FE) is trading at a dividend yield of 3.9%—higher than most utilities. The Utilities Select Sector SPDR ETF (XLU) offers a yield of 3.3%. FirstEnergy’s five-year average dividend yield is ~4.8%. In the first quarter of 2014, FirstEnergy cut its dividend per share from $0.55 to $0.36 when cash retention became vital. Since then, FirstEnergy hasn’t increased its quarterly dividend. Currently, FirstEnergy is trading at a forward dividend yield of 3.9%.
There was a significant bout of selling in utilities last week. The Utilities Select Sector SPDR ETF (XLU), a representative of the S&P 500 Utilities Index, fell 2.3% as the benchmark Treasury yield rose sharply. Broader markets continued to surge and rose 0.4% in the week. On September 19, the ten-year Treasury yield rose to 3.07%, its four-month high.
Sempra Energy (SRE) is the fastest-growing utility in the state. Its presence in outstanding markets like California, the largest economy in the country, and Texas, the second largest, is a big positive. The company is aiming for annualized adjusted EPS growth of 13%, which is much higher than the broader utility (XLU) average. Sempra Energy intends to invest more than $8 billion on capital projects, which will likely expand its US subsidiary rate base by ~7% through 2022.
Currently, FirstEnergy (FE) stock is trading at a forward PE multiple of 15x—lower than its peers’ average forward valuation of over 16x. FirstEnergy expects its earnings to grow 2.5% next year. FirstEnergy is trading at a forward EV-to-EBITDA multiple close to 9.5x—compared to peers’ average of 11x.
Sempra Energy (SRE) has outperformed peers in the state in terms of total returns in the last few years. In the last one year, it returned 2%, while broader utilities also (XLU) returned 2%. PG&E (PCG) returned -31%, while Edison International (EIX) returned -12% in the last year. PCG stock’s steep fall and dividend suspension drove its underperformance.
FirstEnergy (FE), a utility under transformation, is one of the top-rallied stocks among the S&P 500 Utilities (XLU). Currently, FirstEnergy is trading 1% and 8% above its 50-day and 200-day moving average levels, respectively. Both of these moving averages could act as a support for FirstEnergy stock in the short term. The stock closed at $36.9 on September 21.
California utility PG&E (PCG) has been in a solid uptrend with a rise of over 15% in the last three months. California governor Jerry Brown signed legislation on September 21 to strengthen the state’s ability to prevent and recover from wildfires. PG&E’s downed power lines were responsible for starting some of the deadly wildfires last year.
In addition to the ~8% appreciation that we discussed in Part 1 of this series, Enterprise Products Partners (EPD) has offered three distribution payments in 2018, which brings its total returns to ~13% YTD (year-to-date). Enterprise Products Partners is trading at a yield of ~5.9%, which is ~280 basis points higher than the current US ten-year Treasury yield.
As of September 20, Reuters has compiled data from 19 analysts tracking Duke Energy (DUK) stock. Two of them have recommended a “strong buy,” and five have rated it a “buy.” One analyst has recommended a “sell.” The rest of them have recommended a “hold.”
Duke Energy (DUK) has fallen 4.1% YTD (year-to-date). However, the Utilities Select Sector SPDR ETF (XLU) has risen 1.2% YTD. The S&P 500 Index and the S&P Mid-Cap 400 Index, the broader market indexes, have risen 9.6% and 7.6% YTD, respectively. Utility stocks constitute 2.8% and 4.5% of these equity indexes, respectively.
To help investors keep up with the markets, we present our ETF Scorecard. The Scorecard takes a step back and looks at how various asset classes across the globe are performing. The weekly performance is from last Friday’s open to this week’s Thursday close.