NEW YORK (TheStreet) -- The Utility SPDR ETF (XLU) - Get Report is down more than 10% since the end of January. The S&P 500 is up about 2.5% in the same time period. What has caused the mini-crash in utility stocks?
Utility stocks have been hit hard lately due to rising fears of the Federal Reserve raising interest rates in 2015. Some believe the Federal Reserve could raise rates as early as June of this year.
Rising interest rates are bad news for utility stocks. Unlike faster growing dividend stocks, utilities returns come predominantly from their dividend yield. A dividend yield of 4% or 5% that grows at 1% to 3% a year looks attractive when the 10 year U.S. treasury bond yields less than 2%. When interest rates rise, utility stocks lose their investment merit. As a result, their price falls and their yield rises. The recent decline in utility stock prices is due to expectations of rising interest rates.
It is important to note that the Federal Reserve has not yet raised interest rates. When it does, it may be time to move back into utilities as their prices will be depressed -- potentially even more so than now. This article examines the two top utility stocks using The 8 Rules of Dividend Investing methodology, which identifies high quality businesses trading at fair or better prices. Now may not be the perfect time to buy utilities, but it is time to do your homework and identifying the highest quality utility stocks so you are ready to invest when the time comes.
Consolidated Edison, known locally as Con Ed, provides electricity to over three million and natural gas to over one million customers in New York State. The company has a long corporate history. It was founded over 180 years ago and has paid increasing dividends for 40 consecutive years, making Con Ed a Dividend Aristocrat.
Con Ed's stock price has fallen about 15% since the end of January. The company has a strong dividend yield of 4.3%. Con Ed has a stock price standard deviation of just 16.5%, one of the lowest of any publicly traded stock. The company is stable, but it is not a fast grower. Con Ed has compounded its dividend payments at just 1.1% a year over the last decade.
Dividend growth may increase for Con Ed over the next decade. In 2005, the company had a payout ratio of 74%. Now, it has a payout ratio of about 67%. Part of the company's slow growth is because it grew its dividend payments slower than earnings-per-share. The company will likely grow dividends at the same rate as earnings-per-share going forward. This gives Con Ed an expected dividend growth rate of between 2% and 3% rather than 1%.
Con Ed makes a sound investment for income-oriented investors looking for stability and growth that will likely offset the effects of inflation. The stock may make an intriguing buy as a value play if its stock price continues to fall due to fears of rising interest rates.
UGI Corporation (UGI) - Get Report is a diversified utility company based in Pennsylvania. The company has paid dividends for over 125 years, and has more than 25 years of consecutive dividend payments without a reduction. The company owns AmeriGas, the largest propane marketer in the U.S. In total, AmeriGas has about 1.3 million customers in 50 states. In addition, the company provides natural gas and electrical utility services to more than 600,000 customers.
Management's growth goal is to deliver 6% to 10% earnings-per-share growth every year and 4% dividend growth. The company' earnings-per-share growth goals appear much more ambitious than reality would suggest. Over the last decade, UGI Corporation has grown earnings-per-share at 5.9% a year. The company's dividend payments have grown at 7.1% a year. History and recent results indicate an earnings-per-share growth rate of somewhere between 5% and 7% a year is more likely.
The company ranks in the top 25 stocks using The 8 Rules of Dividend Investing. The company ranks highly not because it has outstanding metrics in any one category, but because it is solid across several relevant investing metrics. The company has an above-average 2.7% dividend yield, a solid-if-unspectacular expected growth rate, and a low payout ratio of just 33.2%. In addition, UGI Corporation's stock has a fairly low stock price standard deviation of 22.4%.
UGI Corporation's stock price has declined 14.5% since late January. The company is currently trading at a price-to-earnings ratio of just 12.2 using the company's adjusted earnings-per-share. Investors in UGI Corporation have the potential to see gains from a rise in the stock's price-to-earnings ratio as well as dividend payment sand organic company growth.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.