Utility sector outlook – AGL Energy and Spark Infrastructure good defensive plays

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There are five ASX 100 stocks in the Utilities sector. This sector is very much considered to be a defensive sector with good dividends. Only two of these stocks pass the ‘2.5’ test on consensus recommendations for a market outperform (please see my paper on the Market Updates tab of our website www.woodhall.com.au for details) and one stock is only 0.1 away from that bound.

AGL Energy (AGK) is a gas and electricity sales and distribution company, APA Group is involved in natural gas infrastructure while Spark Infrastructure Group (SKI) invests in infrastructure projects.

The yield on this sector gravitated towards 5.5% along with Financials, Property and Telcos over the last 15 months in what seems to be the place for cash on the sidelines to go to, in search of better yields. However, as we can see from the table, the price paths over the last 12 months have been many and varied. AGK, the biggest player in this sector, does deserve some special mention because of its links to coal seam gas and because some analysts say that this company will not do as well under a Coalition government.
The closing prices are reasonable when compared with the target prices. After all, it is the dividend and stable prices that attract investors to this sector. AGK’s forecast yield is the lowest at 4.3% but the others are much healthier.
AGK’s recommendation trace in Chart 1 has slipped a fraction over the last 12 months while SKI’s is a little better. While APA’s current recommendation, at 2.6, is close to the value that we prefer before adding a stock to a portfolio, the trace has been a little wayward.

The exuberance trace for this sector is shown in Chart 2. It did the ‘classic’ bounce off the 6% trigger for a correction or a prolonged sideways movement in 2009-10. Unlike most other sectors, Utilities have remained reasonably priced since that time and are currently close to fair value.

With the weaker than expected data from China on Monday, and weaker results for the US and Australia last week, defensive sectors are worth some serious attention, for those wanting a yield in excess of those from term deposits. And in light of the tragedy in Boston earlier this week, defensives might help portfolios through the next little while. If we go back to the 9/11 attack – if indeed Boston turns out to be a terrorist attack – our market bounced back within a week or two.

We still have the next 12 months pencilled in for 12% capital gains on the ASX 200 – but we do not expect to get there in a straight line. Defensive stocks play a big role in smoothing out some of the bumps.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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