2 Utility Stocks Worth a Jolt

by Richard Band | November 13, 2012 2:20 pm

I didn’t vote for President Obama.  But maybe I should have.  His reelection victory seems to have triggered a flurry of selling on Wall Street, particularly among a group of stocks I love to buy (when the price is right).  Electric utilities, that is.

In my past two blogs, I’ve already called your attention to the bargains popping up[1] in the utility sector.  I want to underscore that point again, because the values are becoming quite extraordinary.

Consider this interesting fact.  Over the long run (say, the past 25 years or more), the average electric ute has normally offered a dividend yield about 30% below the yield on medium-grade (Baa-rated) corporate bonds—the type of bonds generally issued by electric utilities.

Right now, the two yields are virtually identical.  Relative to corporate bonds, utility stocks are today more undervalued than at any time since 1974.

What’s knocking utility stocks down?  Obviously, it’s fear of a steep increase in the tax rate on dividend income.

I, too, expect that the “fiscal cliff” negotiations will result in some sort of a dividend-tax hike.  However, I doubt the boost will be as drastic as the pessimists are now assuming.  Remember, President Obama’s party controls only one house of Congress.

If I’m right, we should be close to an inflection point for utilities (and other dividend-rich stocks).  Keep buying favorites like Duke Energy (NYSE:DUK[2]) and Southern Company (NYSE:SO[3]).

I had originally mentioned SO in a September 27 post, but the stock has only come down into our buying range in the past few days.  Current yield:  4.6%.  Since we’ve already added DUK to the Incredible Dividend Machine, we’ll track SO as a Niche Investment outside the model portfolio.

By the way, DUK goes ex-dividend November 14.  Thus, if you wish to capture the December dividend, you’ll need to buy the stock Tuesday.

In other company news, NuStar Energy (NYSE:NS[4]) has inked a deal[5] to buy $425 million of crude-oil pipeline, gathering and storage assets, as well as natural-gas-liquids assets in the Eagle Ford Shale region of south Texas.  I think this acquisition will eventually help the partnership work through its problems and return to strong profitability.

Near term, though, NS may find it necessary to cut its quarterly cash distribution.  Hold the units if you own them; they’re trading at a deep discount to the partnership’s value in a potential takeover or breakup.

Endnotes:
  1. bargains popping up: http://investorplace.com/2012/11/retirees-shouldnt-fear-the-storm-in-utilities/
  2. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  3. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO
  4. NS: http://studio-5.financialcontent.com/investplace/quote?Symbol=NS
  5. inked a deal: http://finance.yahoo.com/news/nustar-significantly-expand-presence-eagle-140000584.html

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