Week 234 - Barron’s 500 "Utilities" That Are Dividend Achievers

Situation: Utilities, including communication services companies like AT&T, have such high fixed costs that they’re mainly capitalized by loans. Their stock investors are compensated for this impairment by being awarded high dividend payouts. That places share prices in direct competition with corporate bonds, meaning that newly issued bonds will have higher interest rates than legacy bonds. The price paid for legacy bonds will fall, putting downward pressure on the price paid for utility stocks. Now that the Federal Reserve is determined to raise short-term interest rates we can expect this to occur. The highest quality utility stocks will see only a temporary effect, since earnings growth will continue unabated.

Mission: Identify the highest quality utility stocks in the Barron’s 500 List by picking out the Dividend Achievers, i.e., those that have paid a larger dividend every year for at least the past 10 yrs. Exclude any companies that have an S&P bond rating less than BBB+ and/or an S&P stock rating lower than B+/M. Assess the long-term value of owning these stocks by collecting 25-yr data on price appreciation and risk of loss at the BMW Method website.

Execution: Eight companies are identified as meeting our criteria (see Table).

Bottom Line: Over the long term, this group of 8 companies shows a materially higher total return/yr than the S&P 500 Index, along with a materially lower risk of loss. Over the past 3 yrs, their performance with respect to key metrics of cash flow and revenue has improved, as demonstrated by the data collected for Barron’s 500 rankings in 2015.

Risk Rating: 4

Full Disclosure: I dollar average into NEE and own shares of T.

NOTE: Metrics are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX). Column C in the Table lists the total return/yr on a stock purchase made 9/28/92, the first day of trading for VBINX.

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