Is Now the Time to Buy Utility Stocks?

With the market near all-time highs, perhaps it's time to take a look at utility stocks that feature a low beta, high yields, and promising futures.

Mar 25, 2014 at 1:00PM

Since the advent of the industrial age there has been a direct correlation between economic expansion and energy consumption. With the economy becoming even more energy intensive this trend is likely to continue. One sector has a monopoly in distributing this industrial lifeblood to the modern economy -- the utility sector.

It is also worth mentioning, with the market near all-time highs, that utilities are one of the few sectors to experience less volatility during market pullbacks, which some are forecasting at this point -- meaning utilities could not only be a a wise long-term investment, but if a downturn does manifest, a solid short-term move for capital preservation.

Utilities are regional and growth is mostly dependent on increasing demand. This is usually found through population growth. Areas like Austin, TX, are rapidly growing, and if Austin Energy was a publicly traded company it would be among my top recommendations.

But there are exceptions, as Warren Buffett demonstrated with his purchase of NV Energy last year, which powers the Las Vegas area. This purchase wasn't just about population growth. It was about powering that eternal glow in the middle of the Nevada desert.

But those aren't the only players. The utility sector is filled with high-yielding stocks with promising futures.

Sempra Energy (NYSE:SRE) is a utility holding company that supplies my home area of San Diego among others. During the last year the stock price has increased around 20%, and during the last three years the dividend has increased over 25%, moving from $0.48/share to $0.63/share.

The future looks exciting for Sempra for many reasons aside from the growth that southern California is experiencing. It is expanding into South America and Mexico, two burgeoning markets. It announced on March 20 a joint project with Consolidated Edison (NYSE:ED) to develop five large-scale solar power plants. Finally, it announced on February 11 that The U.S. Department of Energy (DOE) issued a conditional authorization that allows Sempra Energy subsidiary Cameron LNG to export domestically produced liquefied natural gas (LNG) from its proposed liquefaction facilities in Hackberry, LA, to countries that do not have a free trade agreement (FTA) with the U.S.

Emerging markets, natural gas, and solar are all areas that seem to have captured many investors' interest as of late. If these high expectations come to fruition, Sempra could be in a highly enviable position, which is why investors are willing to pay a premium for this stock.

Dominion Resources (NYSE:D) is a supplier of electricity to areas in the Eastern U.S. with 27,500 megawatts of generating capacity, 6,300 miles of electric transmission lines, and 56,900 miles of electric distribution lines. Like Sempra, Dominion is another company that looks to be embracing natural gas and solar, with 11,000 miles of natural gas transmission, gathering and storage pipeline and 21,800 miles of gas distribution pipeline; it also recently acquired three solar power development projects near Indianapolis from Sunrise Energy Ventures.

This position may seem a tad expensive, currently trading at a P/E of 24, but when you consider the numerous areas it outperforms the industry averages it becomes clear why investors are willing to pay a premium. Some of those areas include industry-beating return on assets, return on investment, yield, dividend increases, profit margins, and gross margins.

Coal generation is expected to lose 20% of total capacity due to plant shutdowns by 2016, due to MATS (mercury and toxics standards), and natural gas is projected by the EIA to make up a vast majority of the difference, putting Dominion in a solid position.

Bottom line
Good yields, low beta, and an inelastic product are just a few reasons why long-term investors love utilities. As the economy grows so will utility stocks that are investing wisely. Dominion and Sempra all look to be making strides toward the future of electricity generation with investments in natural gas and solar, which is why investors are willing to pay a premium for these positions.

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James Catlin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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