As of December, 2014, the average price-to-earnings (P/E) ratio for the utilities sector is approximately 23, which is considerably well below the overall market average P/E of 70. The forward P/E, based on projected earnings for utility companies, is 18 for the general utilities of gas and electricity. The forward P/E for water utility companies, however, is 39, which is much more in line with the total market average forward measure of 35.
The Utilities Sector
The utilities sector experienced an unusually good year in 2014, turning out to be one of the best performing sectors with an average stock price gain of 24%. Part of the impressive performance of the sector is spurred by demand. As interest rates continue to be held near zero, the average 4.88% dividend yield available from utility stocks is a very appealing alternative to bond investments. Another positive influence on the sector is the strength of the U.S. dollar. Utilities in the United States tend to show a relatively high positive correlation with the dollar.
Utility stocks benefit from the extra stability provided by the government, allowing them to function as monopolies within their respective areas. This relief from competition provides the luxury of very low operational risk. Even investors more interested in capital gains can use utility stocks as a means of hedging a riskier portfolio with less volatile equities that come with excellent dividend income.
The Price-Earnings Metric
The P/E ratio is a traditionally popular equity evaluation measure. Calculated by dividing current stock price by earnings per share (EPS) the P/E is one of the simplest, most straightforward stock evaluation tools. The P/E ratio is best understood as providing a reflection of the market's current consensus on a company's future growth prospects. A relatively higher P/E generally means the market's expectation is the company will continue to expand its earning potential and generate additional revenue; this is revenue that will eventually be returned as value to shareholders. The P/E ratio is a good metric for comparing similar firms and frequently used in analyzing companies in capital-intensive industries.