“Somewhat expensive”
Managing director Russ Koesterich noted this week that the recent economic upturn has put many defensive stocks in a catch-22. Stock markets have been on a tear in 2013, with both the S&P 500 and the Dow Jones Industrial up 16%.
But as Koesterich explains, there’s one major difference in this season’s soaring stocks:
Typically, when stocks advance dramatically it is a sign of increased risk appetite on the part of investors. In other words, when stock markets climb rapidly, higher-risk asset classes are usually outperforming. While we are seeing some signs of this (high yield, for example, has been performing well), many higher-risk investments such as commodities and emerging markets equities have actually been performing quite poorly. In the current rally, investors are favoring assets that are typically seen as “safe havens”.
Koesterich is talking about utilities. These economic stalwarts are supposed to be slow movers, but investors’ risk-averse appetites have pushed shares just as high as the S&P 500 in recent months.
The Dow Jones U.S. Utilities Index is up 14.4%, with Ameren Corp (NYSE:AEE) and Exelon Corporation (NYSE:EXC) exceeding the industry average. Both utilities offer above-average stability to investors looking to get in on sustainable growth and big dividends.
With Ameren Corp (NYSE:AEE)’s exit from the merchant generation business, its operations (and income) will be highly regulated with some of the steadiest income around. Although Exelon Corporation (NYSE:EXC) operates in both competitive and regulated sectors, the company’s massive 19,000 MW nuclear fleet offers investors an opportunity to own 20% of U.S. nuclear power, a consistent and increasingly cost competitive energy source.
But regardless of stable revenue, Koesterich has a point. Along with Ameren Corp (NYSE:AEE)’s and Exelon Corporation (NYSE:EXC)’s soaring shares, their valuation has gotten increasingly expensive. As a rough analysis, Ameren Corp (NYSE:AEE)’s price to tangible book value is up 20.5% to 1.47, while Exelon Corporation (NYSE:EXC)’s value has shot up 22.3% to 1.63.
EXC Price / Tangible Book Value data by YCharts
Can this sector survive?
Anyone analyzing gains this year would be wise to question utilties’ rapid rise, but a more long-term review adds a pinch of perspective to pricing. Ameren Corp (NYSE:AEE) is still down 20% from pre-recession highs, while Exelon Corporation (NYSE:EXC) stock’s jump leaves it 60% below its 2009 value.
Here at the Fool, we don’t look to past prices to predict future ones, and we don’t play the macro game to figure out which sector will soar as Mr. Market shifts his weight around. In every sector, there are excellent companies with fair prices, and in the long run these corporations will succeed.
A bull market means investors need to be all the wiser allocating investments, but the best companies, utilities or otherwise, will continue to reward investors for years to come.
The article Are Your Dividend Stocks Overvalued? originally appeared on Fool.com and is written by Justin Loiseau.
Motley Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool recommends BlackRock and Exelon.
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