S&P 500 utility stocks aren't just paying sky-high dividends. Their yields are now reaching irresistible heights, analysts say.
Largely due to their falling prices, stocks of 11 utilities in the S&P 1500, including PG&E, UGI and Dominion Energy, now yield more than 5%, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Given that many of these businesses sell commodities that consumers can't cut back on, some are calling this an opportunity for value-focused investors willing to take on risk. The shares are falling as they compete with a 4.7% yield that can be had from just buying Treasuries. But utility stocks are now undervalued and offer upside that Treasuries lack, say analysts.
Utilities are the cheapest they've been since the 2009 recession, says Morningstar.
"We think the sector's 11% drop since last week offers a rare opportunity for investors to buy high-quality utilities at very attractive prices," said Morningstar analyst Travis Miller, whose top recommendations in the sector don't include those with the very highest yields.
Analysts Pound The Table For S&P 500 Utilities
Financial services company Morningstar isn't alone in highlighting the opportunity with utilities. Wall Street analysts are too.
Analysts think all S&P 1500 and S&P 500 utility stocks yielding 5% or more are trading for less than what they'll be worth in 12 months. In fact, the 11 highest yielding utilities are selling for an average 25% discount to analysts' 12-month price targets.
Utilities as a whole trade for a 15% discount to their intrinsic value, Morningstar says. The whole sector is selling off as investors prefer risk-free yields from Treasuries.
The Utilities Select Sector SPDR ETF is down nearly 10% this year. That makes it the worst performing of the 11 S&P 500 sectors. But enough is enough, Morningstar says. "This year has been painful for investors in utility stocks," Miller said.
But Morningstar says utilities should trade for higher valuations than their historical norms due to improving growth, less regulation and solid earnings. Plus, dividends in the sector are likely to grow 6% annually. Utilities are worth a look as they can perform well over time. They've returned 11% annually since 2008, in line with the S&P 500, Miller says.
"Despite the negative sentiment, utilities' fundamentals are strong," Miller said.
Don't Totally Chase Yield, Though
There are perils to chasing the plumpest yields. The highest yielding S&P 500 utility isn't to be counted on whatsoever. PG&E's yield of 35.9% is due to an unusual dividend payment.
The struggling company officially suspended its common stock dividend in the fourth quarter of 2017. But "on Feb. 16, 2023, the Board of Directors of the Utility declared a common stock dividend of $425 million, which was paid to PG&E Corporation on Feb. 28, 2023. On May 18, 2023, the Board of Directors of the Utility declared a common stock dividend of $450 million, which was paid to PG&E Corporation on June 21, 2023," says the company's 10-Q for the second quarter. The company is clear, though, that it's not necessarily reinstating the regular dividend on common stock. And yet, shares are down just 6.5% this year.
But look further and you'll find other utilities with interesting yields. UGI, a utility in Pennsylvania, yields nearly 7%. That's the second highest among S&P 1500 utilities. Shares are down hard this year: 42%. But after a 5% dip in earnings per share this year, analysts predict growth of more than 11% in 2024.
Given the risks, Morningstar's top utility sector picks aren't the highest yielding. It is highlighting Entergy yielding 4.8%, NiSource yielding 4.1% and Duke Energy with a 4.8% yield.
It's bullish on the sector as a whole, though. "We expect total returns of 8% to 10% from utilities at today's valuations, including the sector's 3 to 5% average dividend yield," Miller said.
It's up to investors, though, to decide if they'd rather just take 4.7% from Treasuries.
Highest Yielding S&P 1500 Utilities
| Company | Ticker | Yield | Upside to 12-month target |
|---|---|---|---|
| PG&E | 35.9%* | 25.7% | |
| UGI | 7.0 | 48.9% | |
| Dominion Energy | 6.3 | 23.5% | |
| Avista | 5.9 | 21.4% | |
| NorthWestern Energy | 5.4 | 19.2% | |
| ALLETE | 5.4 | 20.1% | |
| Black Hills | 5.2 | 30.4% | |
| Spire | 5.2 | 19.8% | |
| Northwest Natural | 5.2 | 33.1% | |
| OGE Energy | 5.1 | 14.2% | |
| Evergy | 5.0 | 18.9% |
