Top 3 U.S. Utilities

By Aryeh Katz | May 03, 2010 AAA

The utility sector is revered by conservative investors seeking better yielding alternatives to fixed income securities. In general, utilities boast some of the best dividend yields in the entire universe of publicly traded equities. Regular, dependable cash flows and strong management are the hallmarks of a well-run electricity, water or gas company. But within the sector, there must also be leaders and laggards. We'll look at three U.S. utilities with some of the finest fundamentals in the group.

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Getting Leaner and Meaner
Pepco Holdings Inc. (NYSE:POM) stock is up better than 41% in the last year and pays investors almost 6.6% annually as a holding incentive. That compares very favorably with the Utilities SPDR ETF (NYSE:XLU), which acts as a proxy for the utility sector. The ETF returned 18.0% in the last year and appears to have flattened in recent trading. Interestingly, the telecom sector, represented by the iShares Global telecom ETF (NYSE:IXP), is one of the few sector ETFs that pays a considerable dividend. IXP pays 3.4%.

With a price/earnings ratio of 15.50 and a price to book of just 0.86, Pepco shares boast some of the best fundamental numbers in the utility field. Add to this a price to sales reading of 0.40 and you'd be hard pressed to find a better value investment anywhere. Just last week, Fitch ratings agency raised Pepco's ratings outlook from negative to stable, on news that the company was selling its merchant energy generation business for over a billion dollars. The company plans to use the proceeds from the sale to pay down debt.

Pepco operates in the electricity generation and transmission, and natural gas delivery businesses. Their client base is focused in the mid-Atlantic states and around the WashingtonD.C. metropolitan area.

Fresh Blood
Ameren Corporation (NYSE:AEE) services customers in Illinois and Missouri, supplying them with electricity and natural gas through six separate subsidiaries.

In the last twelve months the company's shares have appreciated by 18% and now pay a healthy 5.9% annually. The stock also sports a very competitive P/E of just 9.31 times last year's earnings. Price to book on the shares is 0.79 and price to sales is just 0.9. Better than 57% of the company's shares are held by investment professionals and institutions.

Ameren recently came under new leadership with the retirement of long-time President and CEO, Gary L. Rainwater, an Ameren employee for over 30 years.

Not Great, But Still Good
Portland General Electric Company
(NYSE:POR) pays a 5.12% dividend and trades with a 15 P/E. The shares are also offer a P/B of 0.96. It is at the lower end of the three options, but still a good deal.

The Wrap
All utilities are not created equal. The fundamentals suggest that the above three names are destined to outperform their peers. (Even in times of economic turmoil, utilities can be a good investment. To learn more, read Trust In Utilities.)

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