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Quarter-End Insights

Utilities: Don't Fear the Fed--Yield and Growth Still Look Good After 2015 Slump

It's time for investors to focus on utilities' fundamental earnings-growth prospects and dividend yields to attain the consistent shareholder returns they expect from the sector.

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  • The global utilities sector is trading at a 0.97 market-cap-weighted price/fair value ratio at the end of November. We think the most value is among regulated utilities with dividend yields above 4% and power producers that can benefit from a rebound in historically low power and natural gas prices.
  • U.S. utilities' 3.7% median dividend yield represents a historically attractive 140-basis-point premium to the 10-year U.S. Treasury yield. Some high-quality utilities are trading with dividend yields that are double those of 10-year U.S. Treasury yields.
  • Merger and acquisition activity picked up in the second half of 2015, featuring some eye-watering valuations. Electric utilities have shown a willingness to pay top dollar for faster-growing natural gas utilities.
  • Global energy markets are convulsing as renewable energy, weak electricity demand, and low worldwide commodity prices bring down margins for fossil-fuel power generators worldwide. Although we think we've reached a bottom, it could be several years before a rebound.

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