My first article was titled “Searching For Value Sector By Sector,” my second article was titled “Finding Great Value In The Energy Sector.” My third article was titled “Finding Value In The Materials Sector Is A Material Thing.” My fourth article was titled “The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income.” My fifth article was titled Beware The Valuations On The Best Consumer Discretionary Dividend Growth Stocks, and my sixth article was titled, Are Blue-Chip Consumer Staples Worth Today’s Premium Valuations?, my seventh article For A Healthier Portfolio – Look Here, my eighth article Is The Financial Crisis Over For Financial Stocks?, my ninth: Improve The Productivity Of Your Dividend Growth Portfolio With Technology, and The Telecommunications Services Sector Untethered and Poised to Grow.
As a refresher, my focus in this and all subsequent articles will be on identifying fairly valued dividend growth stocks within each of the 10 general sectors that can be utilized to fund and support retirement portfolios. Therefore, when I am finished, the individual investor interested in designing their own retirement portfolio should find an ample number of selections to properly diversify a dividend growth portfolio with.
This article will look for undervalued and fairly valued individual companies within the general sector 55-Utilities. Within this general sector, there are several subsectors, which I list as follows:
Select Utility Candidates List
The following portfolio review lists several hand-selected prospective utility stocks in alphabetical order that I felt were currently worthy of consideration. However, and as I will elaborate more on later, due to the typically low earnings growth rate of utility stocks, purchasing them at sound valuation is critical. Simply stated, because these regulated businesses have such low growth rates, they offer little margin for error. I believe you make your money on the buy side, and in order to make any money with utility stocks, they must be purchased at sound valuations.
Moreover, as a general guideline, purchasing utility stocks at sound valuation implies never paying a P/E ratio over 15. Not only will this offer a reasonable earnings yield of between 6%-7%, it will typically provide the income investor an attractive and above-average current dividend yield. But as always, there are exceptions to every rule. In the case of the Utility sector, the exceptions will most often be found among specialty utilities such as water or gas.
Consequently, I alert the reader to the fact that several of your typical electric utilities on the following list currently have P/Es higher than 15. Therefore, I suggest that any typical electric utility with a P/E over 15 on the following list could be given consideration, but only purchased if the price falls enough where the current P/E ratio drops to 15 or below. If history is any guide, I believe that by watchful waiting, the opportunity to purchase any of the following utilities will eventually manifest.
The Danger and Potentially Disastrous Results of Overpaying for a Utility Stock
As I previously discussed, there is no margin of safety when overpaying for a utility stock. Although I do believe that this is one of the safest of all sectors to invest in, that safety factor can easily be lost when overvaluation is present. Therefore, and to make this as clear as possible, I offer the following example of the potentially disastrous results that can occur if you overpay for a low growth utility. To illustrate my point, I will utilize the F.A.S.T. Graphs™ Earnings and Price Correlated research tool and showcase PPL Corp (PPL) an Allentown, Pennsylvania headquartered utility.
