For 2020, the average price-to-earnings (P/E) ratio for the utilities sector was approximately 26.8. This number applies to water, electricity, and gas utilities, as well as any ancillary companies that independently produce or distribute power. Looking forward to the remainder of 2021, analysts project a 28.5 P/E ratio, below that of the S&P 500 index, which is around 35x.
The Price-to-Earnings Metric
The P/E ratio is a traditional equity evaluation measure. Calculated by dividing current stock price by earnings per share, the P/E is one of the simplest, most straightforward tools for reflecting the market's consensus of a company's growth prospects.
A relatively higher P/E generally indicates market expectations that a company will continue expanding its earning potential and generating revenue—all of which are a tremendous draw to shareholders.
The Utilities Sector
The utilities sector experienced a bull market over the past several years through 2021. Broadly considered to be dividend-income producing investments, utilities stocks performed as well as 10-year U.S. Treasury notes. For evidence of this, look no further than the three highest dividend-producing utilities sector stocks listed on the S&P 500 Index:
- PPL Corp., (NYSE: PPL) an Allentown, Pennsylvania utility holding company that engages in the generation, transmission, and distribution of electricity, boasted 5.27% dividends.
- Richmond, Virginia-based Dominion Energy Inc.(NYSE: D), which provides electricity and natural gas to businesses, homes, and wholesale consumers, had 4.52% dividends.
- Southern Co. (NYSE: SO), an Atlanta, Georgia electric sales holding company, boasted 4.01% dividends, despite showing negative returns for the year.
Despite strong returns over the past several years, the utilities sector has lagged through 2021, rising just 14% compared to 43% for communications and 30% for industrials.
Utility stocks enjoy baked-in advantages that enable their success. For one thing, the stability provided by the government allows them to function as monopolistic entities within their respective regions. Decreased competition radically reduces operational risk. For this reason, investors often incorporate utility stocks into their asset allocation mixes, as a means of hedging overall portfolio risk.