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How to Screen For Boring Utility Stocks

Utilities are boring. Since you’re not going to find the next Google or Apple in the group, owning utilities doesn’t give you anything to talk about in the locker room.

A Lot to Like
But there’s a lot to like about utilities. For starters, utilities typically enjoy monopolies in their market area. They don’t have to worry about losing customers to some new website or technological gadget. An economic slowdown might temporarily cut demand for electricity or natural gas. But, long-term, utilities typically grow revenues and earnings in the mid-single digit range, annually. Utilities in faster growing regions do better, and those in regions with struggling economies do worse. While utility share prices might drop with the market during a downturn, they usually recover when the market revives.

All About Dividends
All that said, for most investors, dividends are the main attraction for utilities. Dividends are regular cash payouts that you receive for simply owning a stock. While you’re lucky to get 1% from a bank these days, many utilities are paying dividends equating to 4% or higher yields (your dividend yield is the dividends that you receive over the next 12-months divided by the price that you paid for the shares).

When the market dips, you’ll still receive your dividends while you wait for the market to recover. That only works, of course, if your stock continues to pay its dividends as expected, and that’s the advantage of owning utilities. Because they produce steady and predictable cash flows, dividend cuts are rare.

Screening For Utilities
You can use Morningstar’s free (registration required) and easy to use stock screener to find utility candidates. If you’re not familiar with the term, a stock screener is a program that you can use to search out stocks meeting your specific requirements. Here’s how to use Morningstar’s screener.

Find the screener from Morningstar’s homepage (www.morningstar.com) by selecting Stocks, and then Stock Screener in the Tools section.

Screen Filters
Start by selecting Utilities from the Stock Sector dropdown menu. Then, specify $1 billion for minimum market capitalization (value of all shares out) to rule out smaller utilities, which tend to be riskier than larger firms.

Next, we’ll use Morningstar’s profitability and financial health stock grading features to pick high-rated utilities in those categories. Morningstar grades stocks from A to F, where A is best. Check the A, B, and C boxes for Profitability Grade, and the A and B boxes for Financial Health. These selections require passing utilities to be average or better in terms of profitability, but with above average financial health.

To be on the safe side, I also checked return on equity, a standard profitability gauge that can be applied to stocks in any industry. It compares the last 12-month’s earnings to shareholders equity (book value). Anything above 10% is okay for utilities in this market and that's the minimum value that I specified for this screen.

Finally, I selected a minimum 4% dividend yield. That’s it. Select Show Results to see the list of passing stocks.

My screen listed these eight utilities. If your screen lists more than five or six utilities, click on the Dividend Yield column label to sort the list with the highest yielding utilities at the top. All else equal, go for the highest payers. 

Vectren (VVC), which is paying a 4.9% expected dividend yield.

• Entergy (ETR), 4.8% yield.

• Hawaiian Electric Industries (HE), 4.6%

Public Service Enterprise (PEG), 4.4%

• American Electric Power (AEP),  4.2%

Southern Company (SO), 4.2%

SCANA (SCG), 4.1%

UNS Energy (UNS). 4.1%

Since expected yields move inversely to share prices, you may see different values when you run the screen. As always, consider the screen results to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 8/26/12

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