Utilities sector

[Roadmap2Retire]

Interesting that Utilities turned out to be the top performing sector in 2014. Common sense would indicate that the investors would stay away from utilities considering that there is so much talk about the Fed raising interest rates in mid-2015. Whether the rates will rise in 2015 remains to be seen...

Any thoughts on why you think Utilities performed so well? Folks investing there while the interest rates are low and will eventually quit when they have a clearer picture/forecast of the rates rising? Or am I missing something obvious?

[hendi_alex]

Lots of talk about rising fed rates, but not so much talk about the fact that rates will likely stay historically low for many years to come.

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That is one reason that I started easing back into property REITs.

[EricL]

I think its basically a search for yield on a low rate environment and a search for "safety" as utilities are generally less volatile than some of the other higher yielding sectors.

[Roadmap2Retire]

Hmmm ok thanks.
Ive been watching some water utilities (WTR, AWK and AWR) that I want to add to my portfolio, but the high P/E and Forward P/E multiple stops me from buying. I will wait for a better price. Hopefully the market will get irrational sometime giving us an opportunity

[Dividend Watcher]

I just lightened up on NU yesterday. At the top of their P/E band, yield now hovering just under 3%, FERC just gave them a mild spanking last fall with their allowed ROE and CL&P rate case was similarly tight. They have a bright future with the NStar acquisition and bringing in more gas from the Marcellus and hydro from Quebec will ease some of their resource restrictions but that's a couple years off (at least). Trying to decide what to do with the proceeds. I'll probably get back in when the yield is in the high-3%'s.

[EricL]

(01-07-2015, 07:33 PM)Roadmap2Retire Wrote: Hmmm ok thanks.
Ive been watching some water utilities (WTR, AWK and AWR) that I want to add to my portfolio, but the high P/E and Forward P/E multiple stops me from buying. I will wait for a better price. Hopefully the market will get irrational sometime giving us an opportunity

I agree that the sector is sporting a pretty high PE at the moment and there are likely better deals available in the market. First sniff of rate hikes and the sector will sell off again, just be patient.

[Roadmap2Retire]

Interestingly, this showed up in my inbox today. The 'Chart of the Day' from David Wilson from Bloomberg.
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Utility P/Es Nearing U.S. Highs Signal Caution: Chart of the Day
By David Wilson

(Bloomberg) -- Utility stocks have become too expensive in the U.S. after producing the biggest annual gain since 2000 for an industry gauge, according to John Stoltzfus, Oppenheimer & Co.’s chief market strategist.

The CHART OF THE DAY tracks the monthly performance and price-earnings ratio for the Standard & Poor’s 500 Utilities Index, according to data compiled by Bloomberg.



Last year, utilities rose 24 percent to lead the S&P 500’s 10 main industry groups. The advance lifted the index as high as 19 times earnings, near peaks of 20.1 in 2000 and 19.2 in 2007, when the two previous U.S. bull markets ended.

“Future price gains would be much challenged” unless utility profit rises significantly, Stoltzfus wrote in a report three days ago with a similar chart. Earnings per share for the utility index increased 11 percent last year after falling the previous two years, based on Bloomberg’s figures.

Utilities are one of only three S&P 500 industry groups that rose during this year’s first four days of trading. They added 0.3 percent, which compared with a 1.8 percent increase for health-care companies and a 0.6 percent gain for makers of food, beverages and other consumer staples.

To be sure, dividend yields are higher than they were at earlier peaks. The S&P 500 utility index’s yield last week was no lower than 3.2 percent. It reached 2.74 percent in December 2007 and 2.63 percent in April 2001.

[EricL]

Here is a chart of the 10YR treasury and Utilities ETF (XLU).

Pretty easy comparison to make.

   

[Dividend Watcher]

OK, Eric, I'm trying to figure out what ICAPSD is.

Is the dark line some price of some index? I can't find that designation/symbol on Yahoo Finance. To me, it looks like yield since it's been decreasing since mid-2013. If it's pricing, why is yield going down when pricing is decreasing?

It's obvious to me the red line is XLU's price rising for the past year which we all know is true. Hence, ute yields have been dropping along with the 10Y Treasury which should be expected. We'd expect the yield premium to stay fairly static.

Now if the graph is comparing Treasury pricing with ute pricing, that's just what we'd expect to keep the yield spread but then it gets back to question #1 -- why is pricing going down and yield going down at the same time?

Please educate me because I'm feeling really stupid about now.

[EricL]

Sorry, guess the legend didn't show on the image I copied.

Bottom line is the 10 YR treasury yield and the top line is the XLU.

[Be Here Now]

(01-07-2015, 04:04 PM)hendi_alex Wrote: Lots of talk about rising fed rates, but not so much talk about the fact that rates will likely stay historically low for many years to come.

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That is one reason that I started easing back into property REITs.

I reviewed the latest FOMC transcript and found no commitment to any date for raising rates, contrary to the article headline which mentioned April. They reiterated that their decision will be data driven. Full stop.

The TIPS market is also signalling that long rates are expected to remain low for at least a decade.

I have been waiting for Mr Market to give me better entry prices on equity REITs. No such luck. I have a large IRA rollover that I have been holding mostly in cash, and today's market action, along with the TIPS market, spurred me to start putting that money to work.

[Roadmap2Retire]

Thanks for the update, BHN.
I come up with a similar conclusion when sifting through the data - that the Fed might not (or if its does, it will be a very small) increase in the interest rates. Good to have that validated from others.

cheers