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Quarter-End Insights

Utilities: Sky-High Stocks Flying Too Close to the Sun?

Investors should approach these lofty valuations with caution.

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As 2018 wound down, U.S. utilities were foundering. They had reached what we considered fair value for the first time since late 2015 and were limping into 2019. No longer. Utilities head into 2020 flying high. Perhaps too high.

Low interest rates continue to support U.S. utilities’ historically rich valuations. The sector’s average price/earnings multiple stayed above 20 throughout 2019, a 25% premium to the sector’s 10-year average. Average price/book multiples are over 2.0, and the sector trades at a 16% premium to our fair value estimates.

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