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Utilities' Dividends Look Good, but Valuations Are Rich

Utilities' Dividends Look Good, but Valuations Are Rich

Travis Miller: Utilities are a sector that investors often turn toward for yield, but we also think that investors should be cognizant of valuations. Right now on the yield front, when you look at 10-year U.S. Treasuries below 2% and the U.S. dividend yield for utilities above 3%, utilities look like an attractive yield option. However, valuations are extremely rich. Price/earnings multiples, price/book multiples are all well above three-year decade averages. Even we think the sector is well overvalued. Although it started the year at fairly valued, we think utilities are now 13% overvalued given the run that they've had in 2019.

That said, we do think there are some good yield opportunities. Industry has very good balance sheet strength, fair payout ratios, and a lot of good growth. A couple of names we like are those yielding above 4%, such as CenterPoint, Duke Energy, Edison International, and Dominion Energy. We think these utilities are well positioned to grow earnings and dividends based on the infrastructure investment needs across the U.S.

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Travis Miller

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Travis Miller is an energy and utilities strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers energy and utilities. Previously, Miller was director of the utilities equity research team at Morningstar.

Before joining Morningstar in 2007, he was a reporter for several Chicago-area newspapers, including the Daily Herald in Arlington Heights, Illinois.

Miller holds a bachelor’s degree in journalism from Northwestern University’s Medill School of Journalism and a master’s degree in business administration from the University of Chicago Booth School of Business, with concentrations in accounting and finance. He is a Level III candidate in the Chartered Financial Analyst® program.

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