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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.

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