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Quarter-End Insights

Utilities: Is a Sector-Shaking Pile-up Coming?

Nothing has been able to halt a historic utilities sector rally since mid-2015, but when will the music stop?

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  • The utilities sector kept its foot on the gas during the second quarter, speeding past the peak that the Morningstar U.S. Utilities Index hit in February. Morningstar's worldwide utilities sector coverage traded at a 1.07 market-cap-weighted price/fair value as of the end of May, but the median price/fair value for U.S. utilities is 1.14, near an all-time peak.
  • The 200-basis-point spread between U.S. utilities' 3.6% average dividend yield and 1.6% 10-year U.S. Treasuries suggests utilities have a long way to run, based on historical averages. Even with historically high valuations, utilities' yield properties remain attractive.
  • European energy market policy is splintering. The biggest markets--Germany, U.K., and France--are pursuing three different ways of addressing carbon emissions reduction that an EU-wide carbon credit trading scheme has not achieved. Brexit offers a buying opportunity.
  • Deal-making could continue unabated as long as interest rates stay low.  Great Plains' (GXP) implicit leveraged buyout of  Westar Energy (WR) in May at a 50% premium to our fair value estimate is a template for further industry consolidation among small- and mid-cap utilities.

 

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