Few sectors are more defensive or less sexy than electric utilities. Sure, everyone needs electricity, but government regulation limits what management can do, especially when it comes to prices. And while the S&P 500 ($INX) has climbed nearly 14% in the last 52 weeks, the broader utility sector gained just 5.6%. Indeed, only health care lagged the market by a greater amount.

Still, electric utilities throw off healthy dividends, making them ideal for investors looking for a steady income stream, and their low betas mean they are far less volatile than the S&P 500. When Duke Energy's (DUK) recently inked a deal to buy Progress Energy (PGN) for $14 billion, creating the largest U.S. utility, it injected a bit of, er, electricity into an otherwise boring business. That got us thinking about electric utility stocks -- and whether there might be some bargains hiding in the wiring. Here's what we found.

American Electric Power (AEP) is the second-largest generator of electricity and the largest transmission system owner in the country. Shares have been essentially dead money over the last year, but that's helped keep the relative valuation reasonably attractive on a trailing and forward earnings basis. The dividend yield of 5.2% is mighty tempting, too. On the other hand, the company generates most of its power using coal, prices of which are rising amid the devastating floods in Australia. Furthermore, the weak recovery here at home has has weighed on near-term earnings, cash flow and dividend payments.

Constellation Energy (CEG) has been a money-losing investment over the last year but shares have rebounded sharply since bottoming out in mid-December. The diversified utility has commodity exposure in its customer supply and power generation businesses, which generate the bulk of profits, and now that energy prices are soaring again, so, too, could this stock. Underperformance has made the relative valuation look like a deep bargain, and even after slashing its dividend a year ago, Constellation yields 3%. On the other hand, commodity exposure makes it more volatile than peers as well as the broader market.

Allegheny Energy (AYE) has had a solid run over the last 52 weeks, nearly matching the gains of the broader market while being significantly less volatile. Shares look compellingly valued on a trailing and forward earnings basis, despite the decent run in the stock price. On the other side of the ledger, the dividend yields only 2.4% at current levels, and, as Morningstar analyst Mark Bennett has noted, the company's exposure to market power prices, coal costs and an outstanding friendly takeover bid from FirstEnergy (FE) "all inject uncertainty into its prospects."

For the bull and bear cases on American Electric Power, Constellation Energy and Allegheny Energy, see Face-Off on Stocks above.

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MSmailbox

It may be time to look into deregulating utility companies, much as we did the telephone companies, except for safety factors.

January 21 2011 at 6:41 AM Report abuse rate up rate down Reply
k4jlp

OMG..sell that crude futures contract...crude is tanking...price fixing investigations started on futures...GS is first....

January 20 2011 at 5:48 PM Report abuse rate up rate down Reply
ryan

www.ekocase.com

January 20 2011 at 3:17 PM Report abuse +1 rate up rate down Reply
americandoo

"THINKING OUT OF THE BOX TO STIMULATE AMERICA'S HOUSING MARKET & ECONOMY"

"A VERY VIABLE IDEA & DOOABLE IDEA ! ! ! ! ! "


Why Not Kill 4 Birds With One Stone..

BANKS THAT OWN FORECLOSURES WOULD INSTALL NEW SOLAR SYSTEMS ON FORECLOSED HOMES NATION WIDE.

THESE SOLAR SYSTEMS HAVE TO BE MADE IN THE USA & BE INSTALLED BY AMERICAN'S WHO ARE UNEMPLOYED AND HAVE BEEN RETRAINED TO INSTALL SOLAR SYSTEMS AND THEY WOULD HAVE TO BE WORKING FOR; LICENSED SOLAR CONTRACTORS.

This Program would be offered to HOME OWNERS WHO LOST THEIR HOMES AND HAD GOOD OR EXCELLENT CREDIT BEFORE THEY LOST THEIR HOMES & ALSO FOR FIRST TIME BUYERS ONLY ! !


Independent Appraisers who have no interest in these foreclosed homes could place a value on these homes before the installation of these systems, this would insure that the banks could not pad the Price of the homes and other guidelines would have to be put in place, but this could work to help Stimulate the Economy, be Great for the Environment, Home Buyer's & Banks. "A WIN WIN FOR ALL"


1. This would give Investors and private individuals an extra incentive to buy
these homes thus stimulating the housing economy instantly.

2. This would put more Americans Back to work manufacturing more solar systems.

3. This would cut down on Pollution.

4. This would save money for the owners buying these homes on utilities.

Due to the initial expense of solar systems part of the cost would be added to the home loan, part would be paid by the bank and the government would give the

bank and the homeowner a tax break or whatever details that would be needed to work this out for everyone ! ! THINK POSITIVE THINK AMERICANDOO ! !

This IDEA could be duplicated World Wide putting AMERICA BACK ON THE FAST TRACK.. LEADING THE WAY AGAIN IN NEW INNOVATIVE IDEAS TO STIMULATE THE ECONOMY, PUT UNEMPLOYED TO WORK & HELP OUR ENVIRONMENT AT THE SAME TIME ! ! WINNER WINNER CHICKEN DINNER ! !


Thank You Respectfully, Michael V Caldwell, Always Striving To Be Part Of The Solution Using Respect, Common Sense & Ameri-Can Do Attitude ! !

January 20 2011 at 10:50 AM Report abuse rate up rate down Reply