ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Investors have flocked to utility stocks in a desperate search for yield and have benefited from both stock appreciation and consistent dividends. We looked at the current state of valuation levels in the sector, fully expecting to find that increased popularity had pushed the stocks to prohibitively expensive levels, but found a much more optimistic scenario.
The forward price earnings ratio for the S&P/TSX Utilities sector has been steadily improving since mid 2012 and now stands at 16 times the next twelve months expected profits, down from 21 times (see chart). The surprise is that the sector is becoming cheaper in PE terms rather than more expensive when its dividend yield of 4.8 per cent is 3.5 per cent higher than the five year Government of Canada bond.
The sector is clearly not compellingly, pound-the-table cheap but much more attractive than we expected given other yield-bearing alternatives.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow