Electrify Stock Returns In U.S. Utilities

The U.S. utilities sector has performed especially well in the past several years as the Federal Reserve and central banks around the world enacted accommodative monetary policies to spur growth. As active global investors flock to the U.S. utilities sector in search of yields and high risk-adjusted returns, we explore a number of utility-specific metrics from a unique database that is dedicated to the utilities sector – SNL Energy, an offering of S&P Global Market Intelligence – to ascertain whether investors could have historically made stock selection decisions within the sector to achieve excess returns.

Relative valuation metrics are the most effective in selecting utility stocks. The “cheapest” companies, based on utility-specific metrics, adjusted operating cash flow yield and tangible book to price and outperformed the benchmark by 3.96% and 3.65% per annum, respectively, with significance at the 1% level.

• Rate case determinations, which reflect the relative friendliness of state utility regulators, have an impact on future stock returns. Utilities that win regulators’ approval with the highest allowed return on their rate base outperformed the benchmark by an annualized 1.81% at the 5% significance level.
• Utility-specific metrics outperformed their generic counterparts. Over our testing period, the utility-specific value metric adjusted operating cash flow yield and outperformed the generic one EBITDA-to-enterprise value by 1.27% per annum; allowed return on asset base outperformed ROA by 3.34% per annum.