Ernst & Young predicts difficult road for utility stocks


By: SGN Staff

Quick Take: I'll just get right to the bad news. Utility valuations will not be sustainable in the long run according to a new report from Ernst & Young(EY). This on top of recent commentary from Fitch Ratings and from industry insider Peter Kelly-Detwiler that Wall Street may soon shun utility stocks.


When will the exodus begin? As soon as the Federal Reserve takes action to increase interest rates, according to EY’s report. Better batten down the hatches. - By Jesse Berst


Power & utility sector outlook: valuations likely to continue to fall as market conditions shift, according to Ernst & Young LLP

US Power & Utility valuations, which despite a recent pullback remain well above 10-year historical averages, are not sustainable in the long run, according to a new report by Ernst & Young LLP's Power & Utilities practice.


The report, "The great yield rush: A closer look at total shareholder return in the US Power & Utilities sector," asserts that valuations are likely to continue to drop as the sector grapples with shifting market conditions. The recent pullback was sparked by speculation that the Federal Reserve will taper its bond-buying program before the end of the year, a move that would cause interest rates to rise.


"The years of significant capital inflows helping to drive shareholder returns based upon market uncertainty are over,” said Joseph Fontana, EY Global Transactions Power & Utilities Leader. "In the years to come investors will reward those utilities that can deliver steady dividends and credible growth prospects in the face of industry transition.”


In this economic climate, investors in search of better returns will leave the relative safety of the power & utilities sector in favor of higher-growth potential in the financials, technology and consumer discretionary sectors, as well as rising fixed income securities, according to the report. At the same time, the forecasted anemic electricity demand over the next two decades, combined with significant capital investment requirements, will place pressure on utilities’ ability to continue delivering attractive returns.


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