Regulated utility stocks, with a 4.5% to 5% dividend yield and 2% to 3% annual dividend growth, are fully competitive with the broader market right now given the context of slowing economic growth and contained inflation, says Hugh Wynne, Senior Research Analyst at Sanford C. Bernstein & Co., LLC.
“There is a compelling case to be made for holding a market weight or above market weight in regulated utility stocks,” Wynne said. “Given the 5% dividend yields available on some of the competitive names, these investors feel they’re getting paid to wait until the cycle turns and earnings power is restored.”
Wynne recommends looking at PG & E Corp. (PCG), an energy-based holding company headquartered in San Francisco, because the stock is undervalued after the San Bruno pipeline explosion and subsequent regulatory review to determine the appropriate fine and resulting capital expenditures for PCG.
“Until that’s resolved, a lot of investors have backed away. As a result you have a company which in the end probably represents one of the superior utility franchises in the nation trading at 15% discount to its long-term value. So I think that’s an opportunity for those that have a stomach for the risk,” Wynne said.
Long-Term Earnings Growth for Regulated Utilities
September 30, 2011