Utilities face headwinds in 2012 due to difficult comps after outperforming as a group in 2011 and as other sectors raise their dividend yields. But as the economy improves, Jonathan Arnold, Managing Director at Deutsche Bank, says he will focus on value opportunities and names with potential catalysts.
“As the macro environment has stabilized somewhat, investors are a bit more comfortable I think with taking risk generally in the market. We think that’s an opportunity for some of the more beaten-down utilities with maybe issues, challenges or catalysts that struggled in last year’s defensive market environment,” Arnold said.
Arnold’s top pick for 2012 is Edison International (EIX). Arnold says EIX is a sum-of-the-parts story where Edison Mission Energy, an entity with coal exposure and environmental challenges, is driving down the price of Southern California Edison. In the next 12 months, he expects management to restructure to salvage value.
“What appears to be a high-p/e, low-yield story at first glance at consolidated earnings is actually a lower-p/e with a potentially higher yield. On the latter, some time in the next probably a two-year period, we see a reasonably good chance that the dividend is raised more in line with peers on a payout basis,” Arnold said.