Which Utilities to Buy On The Utilities Dip?

I notice some utilities have dipped as much as 20% from their 52-week highs. The dip maybe a rotation of funds out of the typically slower growth utilities sector for the purpose of profit-taking, or maybe investors are worried that interest rate hikes will cause the typical high-yielding utilities to dip further.

Because of the dip, I reviewed the 30 utilities in The Utilities Select Sector SPDR Fund (NYSEARCA:XLU) to see if there are treasures to be found. I filtered down to one utility that has had stable, growing earnings for more than a decade.

Southern Co, a Stable Utility with 5% Yield

Here, I present Southern Co (NYSE:SO), which has a S&P Credit Rating of A, sustainable debt levels, and is trading close to a price-to-earnings ratio (P/E) of 15 priced around $43 per share today.

Southern Co. fundamental analysis graph

I believe it’s fairly priced today, hitting the orange earnings line. The blue normal P/E line indicates that it has historically traded at a P/E of 16.

Since 2005, the company has increased dividends by 3-4% per year. I’d say that’s keeping pace with inflation. With a juicy yield of 5%, and growing say at 3% going forward, it should keep pace with general market returns of 7%.

ITC Holdings, a Faster-growth Utility at a Discount

ITC Holdings (NYSE:ITC) is not in the XLU, but it is the largest independent electric transmission company in the United States. Although it only spots a yield of under 2%, it is a faster-growing utility estimated to grow earnings at a rate of roughly 8%.

As analysts downgrade it today, it dropped about 2% to the P/E of 17.4. Here’s some further reading on ITC Holdings.

The above is actually a summary and update from my Seeking Alpha article.

From the comment stream of that article, Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) and Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) came about.

Brookfield Renewable

Brookfield Renewable generates its power using renewable energy, 80% from hydropower and the rest mostly from wind energy. 75% of its assets are in North America, with 20% in Brazil, and 5% in Europe.

The utility pays a quarterly distribution of US$0.415 per unit. This equates to 5.5% for US investors at US$30.25 per unit or 5.2% for Canadian investors assuming the share price of C$38 and a forex of US$1 to C$1.19.

Brookfield Infrastructure

If you don’t own any utilities, you might want to start with Brookfield Infrastructure. Why? It’s simply more diversified. Not only does it owns some electric transmission lines across North & South America, but it also owns some rail transportation businesses in Australia and South America, toll roads in Brazil and Chile, and 30 port terminals in North America, the U.K., and Europe. The utility pays a quarterly distribution of US$0.53 per unit.

This equates to 4.9% for US investors at US$43.40 per unit or 4.67% for Canadian investors assuming the share price of C$54 and a forex of US$1 to C$1.19.

Both Brookfield Renewable and Brookfield Infrastructure are partnership units so some of their distributions are taxed differently. I’ve heard from Canadian holders buying them in the TFSA is a way to avoid the tax hassle, but there maybe a tiny cut of the distribution sometimes. I don’t hold any units myself yet, so I can’t speak from my own experience, but you can learn more below.

Final Notes

The Brookfield utilities is certainly an alternative choice for US and Canadian investors alike. I think it’s worth it to explore them. The companies also stated that they intend to grow distributions between 5-9% in the long-term. Now, I don’t know how long they mean in long-term, but the future is always uncertain, so I will assume it’s 3 years, and keep watch from here.

This kind of growth beats Southern’s 3-4% growth, although Southern’s 5% yield maybe important for investors looking for current income. Also, the Brookfield yields double ITC Holding’s yield. At the end of the day, check with what you currently own in your portfolio, your risk and comfort levels. Generally, if you’re diversifying into high quality companies, you should be fine.

Make sure you write down what you expect from your investment, and review that periodically, maybe once a year. If the investment is not meeting your goals after some observation periods that you set, perhaps it’s time to move on.

Further Reading

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Disclosure: At the time of writing, I am long NYSE:ITC.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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