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Pipe Dreams: Time to Sell These Gas Utilities

Attractive growth opportunities can't cover up nosebleed valuations.

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The pure-play U.S. gas utilities we cover have dramatically outperformed the S&P 500 and their U.S. electric and diversified utilities peers so far in 2014. The five-- AGL Resources (GAS),  Atmos Energy (ATO),  New Jersey Resources (NJR),  Piedmont Natural Gas (PNY), and  WGL Holdings (WGL)--have been contesting for the dubious designation of the most overvalued utility in our coverage universe. Valuations on these sleepy utilities aren't sleepy at all, and that should concern shareholders.

Gas utilities are no longer exactly slow-growing, conservative, dividend-paying grandma stocks. Growing exposure to nonregulated businesses and increased pipeline safety concerns following lethal accidents make these firms' results more volatile and more growth-oriented than they have been in years. In addition, gas utilities could benefit from the ever-increasing forecasts for midstream investment needs driven by the shale gas boom. With utilities' 3.8% dividend yields still historically attractive relative to 10-year U.S. Treasury rates, this combination of yield and growth has been an attractive investment proposition. But all key valuation metrics still point to a lot of hot air in these stocks.

Mark Barnett does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.