Associated Press This year has been a blow-out for shares of U.S. utilities, but gains have left the sector with its highest valuation in more than a decade, raising questions about whether that performance can last.
Investors have sought out exposure to utility stocks this year in part because of their higher-than-average dividend payments, making this normally staid sector the best-performing corner of the S&P 500.
The Utilities Select Sector SPDR Fund (XLU) rose 1% on Friday, on pace to close at a record high.
J.P. Morgan notes on Friday that that 31.1% total return for the utilities sector, compared with a 14.9% total return for the S&P 500, is the highest since 2000, when utilities netted investors 57.2%.
It’s logical that strong performance has boosted the sector’s valuations.
Utility stocks on the S&P 500 now trade at a lofty 17.8 price-to-earnings ratio based on analyst expectations for next year. That’s fully a 7% premium over the P/E for the S&P 500. This premium, or distance between the P/E for utilities and the S&P 50, is actually still below its three-year average of 10%, says J.P. Morgan’s Christopher Turnure, because the broader market is also having a solid year.
Turnure notes that utilities have been hiking dividend payments at a rate that meaningfully outpaces earnings growth. Companies including AES (AES) and Edison International (EIX) both hiked dividends this month.
But short-sellers appear to be looking to profit from declines, or at least underperformance, in utilities at a higher rate. Average short interest for the 36 major utilities at the end of last month was 7.5%, up from 5.9% a month earlier, Ternure writes.
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