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Utilities' Dividends Still Attractive, but Headwinds Remain

Even though the utilities sector appears fairly valued, there are pockets of opportunities and potential pitfalls that investors must watch carefully in the coming months.

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  • Our global utilities sector coverage is trading at a 1.01 market-cap-weighted price/fair value ratio as of mid-March. We think U.S. regulated utilities are the most overvalued, trading at a median 11% premium to our fair value estimates. However, most of the international utilities and U.S. power producers we cover are trading below our fair value estimates.
  • U.S. utilities' 3.7% median dividend yield represents a historically attractive 170-basis-point premium to the 10-year U.S. Treasury yield. Some high-quality utilities are trading with dividend yields that are double those of the 10-year U.S. Treasury.
  • The regulatory struggles that  Exelon (EXC) and  NextEra Energy (NEE) have faced trying to gain approval for their respective acquisitions does not bode well for utilities such as  Duke Energy (DUK),  Southern Co. (SO),  Dominion Resources (D), and  Fortis (FTS) that will have to get regulatory approval for their proposed acquisitions. We think Fortis and Southern have the best chance of closing.
  • Our recent utilities sector moat review resulted in 11 moat downgrades since December. Structural energy market changes, regulatory developments, and management's ability to meet regulatory budgets are the key factors we reviewed. We now assign narrow or wide moat ratings to 39 U.S., European, and Latin American utilities we cover and no-moat ratings to 28. Dominion Resources and  ITC Holdings (ITC) are the only two wide-moat companies.

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