Has the light turned green on Utilities?
The Utilities sector has a market capitalization of about $48 billion. Some of the names that are included in this sector in Canada include Algonquin Power Inc., Atco Ltd., Canadian Hydro Developers, Canadian Utilities, Emera Inc., Energy Savings Income Trust, Epcor Power L.P., Fortis Inc., Northland Power Income Fund and TransAlta Corp.
The high for the Utilities sector over the last year was $232.68 reached on October 30 2007 and the low was $156.72 reached on October 10, 2008. Since the low, the Utilities sector has increased 11.5 % while the TSX has stayed flat and the S&P 500 has dropped about -2%. Year-to-date the Utilities sector has declined -22.18% while the TSX has dropped -34.53% and the S&P 500 has dropped -40.53%. Since the low on October 10, 2008 we are seeing rising bottoms that are a bullish signal; however, there are also falling tops that are not a bullish indicator, rather a sign of a consolidating price. Nevertheless, it is a change from the ongoing downward spiral we have been used to seeing.
Like other sectors, a lot of steam has come out of the Utility sector. The P/E ratio is now trading at 18.64 times which is still substantially higher than the market as a whole. The average dividend yield is 5.05%. The yield varies with companies from 0% for Canadian Hydro Developers to 14.92% for Energy Savings Income Trust. Another measure to look at is the price-to-book value which has also fallen substantially. The down side to a utility is the debt that most utilities carry and the capital requirements to see them through new developments. Make sure you check out the contracts the company has in place and pay attention to debt-to-equity, free cash flows and payout ratios on your individual security choices. In this environment where credit has all but dried up you want to access the companies’ ability to finance its existing and future projects.
Utilities are an attractive industry in any recession because the have great cash flow and income streams. With Barack Obama as the President-elect in the United States there is a lot of talk/expectation that infrastructure and green energy will receive more attention and therefore the Utilities sector will stand to benefit. In The Economist magazine, an article entitled “Clean technology in the downturn, Gathering Clouds” argues that the economic slowdown casts a shadow over the prospects for clean technology. The NEX, an index that tracks clean-tech stocks globally, has tumbled even faster than the market as a whole, down about 60% in the last year. This suggests an orange light may be more appropriate than green on at least this segment of the Utilities sector given the tough credit market.
The high for the Utilities sector over the last year was $232.68 reached on October 30 2007 and the low was $156.72 reached on October 10, 2008. Since the low, the Utilities sector has increased 11.5 % while the TSX has stayed flat and the S&P 500 has dropped about -2%. Year-to-date the Utilities sector has declined -22.18% while the TSX has dropped -34.53% and the S&P 500 has dropped -40.53%. Since the low on October 10, 2008 we are seeing rising bottoms that are a bullish signal; however, there are also falling tops that are not a bullish indicator, rather a sign of a consolidating price. Nevertheless, it is a change from the ongoing downward spiral we have been used to seeing.
Like other sectors, a lot of steam has come out of the Utility sector. The P/E ratio is now trading at 18.64 times which is still substantially higher than the market as a whole. The average dividend yield is 5.05%. The yield varies with companies from 0% for Canadian Hydro Developers to 14.92% for Energy Savings Income Trust. Another measure to look at is the price-to-book value which has also fallen substantially. The down side to a utility is the debt that most utilities carry and the capital requirements to see them through new developments. Make sure you check out the contracts the company has in place and pay attention to debt-to-equity, free cash flows and payout ratios on your individual security choices. In this environment where credit has all but dried up you want to access the companies’ ability to finance its existing and future projects.
Utilities are an attractive industry in any recession because the have great cash flow and income streams. With Barack Obama as the President-elect in the United States there is a lot of talk/expectation that infrastructure and green energy will receive more attention and therefore the Utilities sector will stand to benefit. In The Economist magazine, an article entitled “Clean technology in the downturn, Gathering Clouds” argues that the economic slowdown casts a shadow over the prospects for clean technology. The NEX, an index that tracks clean-tech stocks globally, has tumbled even faster than the market as a whole, down about 60% in the last year. This suggests an orange light may be more appropriate than green on at least this segment of the Utilities sector given the tough credit market.
Labels: Rallies and Reversals
posted by David Allard at
1:14 PM
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