Utilities high yields and steady earnings growth does not come cheap. “In late January, the median U.S. utilities valuation hit the highest level ever since Morningstar began covering utilities,” according to Moringstar‘s director of utilities equity research. “The February swoon cut that premium in half. We also cut our cost of capital assumption in our discounted cash flow valuations to reflect historical inflation and real interest rates, bringing valuation premiums down another 10%. As of mid-March, utilities’ median valuation was only slightly above market prices and in line with valuations in late 2013 before the 27% run in 2014.” [A Contrarian View of Utilities ETFs]
The sector trades “for an average 16.4 times estimated 2015 earnings. However, the sector is at a 5% discount to the Standard & Poor’s 500 price/earnings ratio based on projected 2015 earnings,” according to Barron’s.
Rising rate fears continue to chase investors from utilities ETFs. Last month, investors pulled a combined $533 million from consumer staples and utilities ETFs, according to State Street data. As of May 5, investors had pulled over $835 million combined from XLU and the rival Vanguard Utilities ETF (NYSEArca: VPU). [Trouble for Bond Proxy ETFs]
Utilities Select Sector SPDR
