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Quarter-End Insights

Utilities: Repeating a Stellar 2014 Performance Will Be Tough

Utilities' 23% total return through mid-December topped all sectors except for M&A-fueled health care.

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  • Utilities lived up to their reputation as bond substitutes in 2014. The Morningstar Utilities Index total return was 23% through mid-December, in part helped by interest rates that fell 30% during the calendar year.
  • Relative to fixed-income substitutes, utilities remain an attractive yield investment. As of mid-December, utilities' average dividend yield was 3.7% compared with a 2.1% yield for the 10-year U.S. Treasury. This remains a historically high yield premium even though utilities' average dividend yield is below their 4.5% long-term average yield.
  • Frustration in Europe on all sides of the energy debate is leading to policy rethinks continentwide. The U.K. took the most aggressive step by instituting a capacity market starting in 2018. Successful implementation could spawn followers, providing a competitive lifeline to most of the beleaguered European utilities.
  • Eastern U.S. power and gas markets have settled since last winter's polar vortex, but policy changes to avoid a repeat will lock in long-term benefits for some power producers. Wide-moat  Exelon (EXC) should be a key beneficiary if the Federal Regulatory Energy Commission approves proposed capacity market changes.

Travis Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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