A recent analysis by Russ Koesterich from BlackRock, Inc. highlights potential overvaluation in utility stocks, despite stable returns and substantial dividends. The surge in share prices of companies like Ameren Corp and Exelon Corporation raises concerns about expensive valuations, urging investors to proceed with caution.
Analysis Indicates Potential Overvaluation of Utility Stocks
A recent analysis by Russ Koesterich, the global chief investment strategist at BlackRock, Inc. (NYSE:BLK), highlights a possible overvaluation in utility stocks. The commentary, published on May 15, 2013, points out that despite a significant economic upturn and a 16% rise in both the S&P 500 and the Dow Jones Industrial Average in 2013, investors have been favoring traditionally safer assets, including utility stocks.
As a part of this trend, the Dow Jones U.S. Utilities Index has increased by 14.4%. Among notable performers in this sector are Ameren Corp (NYSE:AEE) and Exelon Corporation (NYSE:EXC). These companies are popular among investors for their stable returns and substantial dividends.
Ameren Corp has exited from the merchant generation business, thus focusing on regulated operations, which promises steady income. Exelon Corp, with its significant 19,000 MW nuclear fleet, provides a stable 20% of U.S. nuclear power, positioning it as a cost-competitive energy source.
However, Koesterich notes that the share prices of these companies have soared to levels that might be considered somewhat expensive. For instance, Ameren’s price to tangible book value ratio has climbed by 20.5% to 1.47, while Exelon’s has risen by 22.3% to 1.63. This sharp rise points to a potential overvaluation, warranting cautious consideration from investors.
