The great yield rush
Total shareholder return: power and utilities
EY took a closer look at total shareholder return in the US power and utilities sector.
Investors aggressively pursuing yield have pushed utility valuations to pre-financial crisis levels. However, news that the Federal Reserve could begin a tapering regime on monetary policy is set to create a new set of challenges for the sector.
In an uncertain economy, investors have turned historically towards the relatively safe harbor of rate-regulated utilities. Despite forming the foundations of portfolios, when optimism returns, investors typically venture further up the risk curve in search of higher growth opportunities.
True to form, in 2011, amid a volatile market environment spurned by global economic concerns, the EY50 delivered a total shareholder return (TSR) of 18.4%.
In 2012, among rising investor confidence, the tide turned for utilities. For most of the companies in the EY50, TSR fell to near zero as the S&P 500 took off.
We would expect utilities to be underperforming in 2013; however, nothing about the current situation is normal. The EY50 has returned 7.9% TSR year-to-date.
To drive broader economic growth, the Federal Reserve has kept interest rates low, sending investors scrambling for higher yields. The utilities have provided an alluring yield, including an average dividend of 4.2% in 2012, that has attracted investors and driven P/E multiples well above historic norms.
Changes in Federal Reserve policy, a sudden rise in Treasury rates, or ever-growing investor confidence that the US economy will not contract in 2014 could disrupt this balance and suddenly make utilities look overvalued.
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