Goldman Bullish On Utilities In Light Of Plunging Treasury Yields

Endesa power plant

In light of the inability to find yield on Treasuries, Goldman says to go long dividend-paying utilities:

Low interest rates and valuation drive our more constructive view on Regulated Utilities and Diversified Utilities

With 10-year Treasury yields likely to remain at or below 3% for the next few quarters, and with utility valuations near historical average levels, we upgrade our coverage view on both Diversified Utilities and Regulated Utilities to Neutral from Cautious. When Treasury yields remain below 3%, utilities generally trade more in-line or even at a premium to the S&P, and only at higher Treasury yield levels do utilities trade at a 1.0-1.5X discount to the market. We still expect earnings to trough for Diversified Utilities in 2012 and demand growth to remain weak in most of the US.

Who does Goldman like?

We add large-cap PPL and small-cap EE to the Conviction Buy list

PPL still trades at a discount to peers, but offers (1) a 5.5% dividend yield, (2) positive catalysts, including environmental project approvals in Kentucky, and (3) long-term exposure to tightening power markets as coal plants retire, given PPL’s relatively low-emissions generation fleet. Besides benefitting from above average demand growth, EE provides significant capital allocation opportunities – via industry-leading dividend growth and the ongoing share repurchase program.

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