Electric Utility Stocks Are Not Safe Right Now

These 'dividend darlings' are trading at unsustainable levels

   
Electric Utility Stocks Are Not Safe Right Now

Looking back over more than 25 years as portfolio manager, columnist and broker, I can honestly say that I have never lost a dime in electric utility stocks.

Yes, I have owned dozens of them at various times in my career and made money every single time.

There were two secrets to my successful approach. First, I waited for a market collapse or economic slowdown to be a buyer of electric utility stocks. I always purchased them at a discount to tangible book value without worrying about earnings or even dividends.

The power plants, transmission lines and other facilities owned by utilities are extraordinarily valuable and buying them at a discount to book creates an enormous margin of safety.

The second secret to my success with utility stocks is that I held them until a recovery occurred. Markets will get better with time and the economy usually rights itself as soon as the politicians quit trying to fix it. As the sector begins to improve, I usually start selling the stocks at somewhere between 1.5 and 2 times book value.

My average holding period has been about 2.5 years and, if you ask me, doubling my money plus collecting decent dividends along the way is a pretty successful investing approach.

When I look at the electric utility sector right now, though, not one single stocks trades at a discount to book value. Yield-seeking investors have been steadily buying the shares and pushing them up to what I think are unsustainable valuation levels.

In spite of this, Wall Street analysts continue to recommend the stocks — especially for income seeking investors — and I think it could turn out to be very painful to take their advice right now. Utility stocks trading at more than 2 times book and 20 times earnings are in a danger zone … and that is exactly where many of them trade right now.

If you look at a price chart of an electric utility stock, most of them look like growth stock issues over the past year — moving up at a rapid pace. Many of them are up 30% to 40% or more in the past year.

But business conditions haven’t improved for the utility sector in a way that justifies such a run.

Instead, it’s all about yield-chasing and low interest rates. Sadly, investors who buy here in hopes of collecting dividends may just find that the 4% dividend does little to offset the double digit loss they experience in power paying for the shares.

The bottom line: Electric utility stocks have long been considered a safe haven for investors, but right now they are anything but that.

Avoid the sector until the stocks become more reasonably priced.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/utility-stocks-not-safe/.

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