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Quarter-End Insights

Utilities: Bloody February Brings Valuations Back In Line

We don't see an end to this atypical volatility until interest rates rise back toward historical norms.

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  • U.S. utilities' 10% drop in February was the sector's worst performance since the late 2008 market crash and was one of the top 10 worst months in at least 50 years.
  • After Morningstar's utilities sector valuations hit an all-time high at the end of January, the sector's February swoon and our internal recalibration of underlying interest rate assumptions have brought market valuations nearly in line with our estimates. 
  • Outside of the eurozone, utilities' fundamentals remain strong with moderate payout ratios, solid balance sheets and a bevy of high-quality growth opportunities.
  • Utilities' 3.6% dividend yield as of mid-March is still historically attractive relative to 10-year U.S. Treasury yields at 2.2%. However, utilities' dividend yields remain well below their 4.5% 25-year average.

Getting a handle on utilities the past few years has been as hard for investors as predicting when the Federal Reserve will blink. Utilities were the best-performing sector in 2011, the worst-performing sector in 2012-13, and the best performing sector in 2014. The first part of 2015 is proving just as erratic with utilities trouncing every sector in January before falling 10% in February, the sector's worst stretch apart from the 2008, 2001, and 1974 market crashes. We don't see an end to this atypical volatility until interest rates rise back toward historical norms.

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

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