The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By By Adam Fischbaum
NEW YORK ( StreetAuthority) -- Last year, the Dow Jones Utility Average was on a tear. At least for a boring utility index, it was. The index returned 15% before dividends, its best annual performance in four years.
Throw in dividends, and we're probably flirting with close to a 20% return.
Some of the bigger utilities performed even better then the index. Atlanta-based Southern Co. (SO), for instance, returned about 17% before dividends, while North Carolina power giant Duke Energy (DUK) turned in 23% before dividends. That's quite impressive, considering the S&P 500 was dead flat for the entire year, returning only about 2%.But things have changed. Well, sort of... The pundits and spinners would have you believe that utilities fell out of bed in the first quarter of 2012. But while these stocks are visibly lagging the broader market, with the DJU having returned -1.7% so far this year, compared to a roughly 10% gain for the S&P 500 in the same period, a lot of the more widely held utility stocks are what I consider fully valued. They are trading at price-to-earnings ratios of 14 or higher. As a money manager and an investor, I like to see forward P/E ratios below 15 for larger utilities, with dividend yield of 5% or higher. I've recently recommended, for instance, Exelon (EXC), which is a very attractive holding. It's still a timely idea that fits my P/E and dividend criteria. Another utility stock I've also followed closely is TECO Energy (TE). Here's why this stock has attracted my interest lately:
Diverse, Progressive, UndervaluedStarting out as Florida's old Tampa Electric Co, TECO has evolved into a holding company with diverse energy operations. The different divisions encompass electric power generation and distribution, natural gas distribution, a coal mining operation and a Guatemalan electric utility subsidiary. The new Tampa Electric Co. now operates as TECO's main subsidiary. The bulk of TECO's business, about 60.5%, comes from the electric utility operations in Florida, which provides the company with steady cash flow. And although the state's economy and housing market are still trying to get off of the mat, the company is forecasting a slight customer growth in that business line for 2012. Positive customer growth for an electric utility is an impressive accomplishment, considering Florida has one of the worst housing markets in the nation.
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