Skip to Content
Quarter-End Insights

Utilities: Tough to Stop This Sector's Powerful Performance

Current spreads suggest utilities could still produce attractive returns even if the Fed continues to raise rates.

Mentioned: , , , , , ,
  • On a global basis, utilities continue to be overvalued, with a 1.12 market-cap-weighted price/fair value ratio as of the end of May. On an equal-weighted basis, U.S. utilities' 1.15 P/FV and 21 forward P/E as of mid-June are down from their mid-2016 peak but still far above what we consider reasonable. We see more value among the large European diversified utilities, but we caution those come with higher uncertainty ratings and few economic moats.
  • We've long told investors that a wide spread between utilities' dividend yields and interest rates would dampen the market's reaction to rising rates. This continues to play out. In June, the 10-year U.S. Treasury rate fell again to 2.2%, yet utilities' dividend yields have held near 3.5%, with dividend growth offsetting still-climbing stock prices. The 130-basis-point spread between Treasuries and dividend yields remains a bullish signal.
  • Despite the Trump administration's recent decision to exit the Paris agreement, we continue to see strong renewable development opportunities for utilities. We continue to forecast U.S. renewable energy capacity doubling during the next eight years. State renewable portfolio standards, or RPS, and other local policies remain the industry's primary growth driver, not federal environmental policy.
  • Rising interest rates and a dearth of potential acquirers has quashed the regulated M&A market, but depressed independent power producer valuations have received interest from private equity firms that have the appetite to stomach near-term volatility for long-term upside.


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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.