Buyers Beware: Defensive Stocks May Peak Soon
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All types of investors continue to flock to defense-minded dividend stocks even as the writing is on the wall that the nice ride may not last much longer. Here we have had a perfect storm: Defensive stocks growing in value yielding high dividends! Wow, I am in heaven. But signs of these companies becoming over-valued are cropping up. Stocks of large, dividend-paying companies have been a popular yield play at a time when bond yields are at record lows, in large part because they offer a solid, yield-based defensive strategy while also promising at least the possibility of price appreciation
The defensive stocks are always less vulnerable to a slowing economy or struggles like Europe is facing. The stocks not only give a nice dividend but have grown nicely too; it is an investor’s dream. But at this point, some are wondering if the dream may be coming to an end as these stocks are now getting too expensive. Telecommunications, Utilities, and Consumer Staples are examples of sectors that have outperformed the markets. Many stocks in these sectors that are growing with high dividends are now trading at 15 times earnings for 2012. Vadim Zlotnikov, chief market strategist at Alliance Bernstein, says investors are paying 25% more for dividend-paying stocks than for those that pay no dividends—usually labeled “growth” companies.
Analysts may be concerned, but when will this end? Logic does not dictate that everyone suddenly stops buying as soon as the stocks become too expensive . The trend will continue as long as investors see dividend stocks as the only alternative to making money while bond rates hover near next to nothing. This trend will continue to work until another alternative reveals itself. But I believe investors will keep the trend moving, at least in the short term. I expect money to continue to flow this way.
Here's an example of four growing defensive stocks.
Wisconsin Energy Corp (NYSE: WEC) is the largest electric and natural gas utility in Wisconsin and the 7th largest in the country. WEC serves 1,132,500 electric customers and 1,049,500 natural gas customers in the Great Lakes region (Michigan and Wisconsin). Analysts at UBS downgraded Wisconsin Energy Corp from “buy” to “neutral.”
Like most other companies in a diverse range of industries, these defensive stocks have experienced shrinking revenue year over year. And as can be seen from the market cap and EBITDA, ratios are in line as per size of company.
Alliant Energy (NYSE: LNT) is an investor-owned public utility holding company focusing primarily on regulated electricity and natural gas services with a dividend yield of about 3.9% right now. The company was recently downgraded by Ladenburg Thalmann from "buy" to "neutral." The proposal (discussed below) includes a WPL 2013/2014 rate base of $2.2b/$2.3b, approximately $200/$300m below our previous expectations. The reduction, according to LNT, primarily relates to deferred taxes. We now estimate lower WPL earning power over the next two years of approximately $0.15 p/s.
Integrys Energy Group (NYSE: TEG) is an electric and gas utility in the Great Lakes Region. It recently crossed the 5% dividend yield mark this year and that has attracted a lot of interested investors as a bond alternative. Recently Daniel Verbanac, President of the company, sold 7,552 shares of the stock. Barth Wolf, the VP, also sold 6,491 shares. Usually this is a bad sign. Could it be that all those analyst downgrades are signs that the end of the upward movement is near?
Xcel Energy (NYSE: XEL) is a holding company with subsidiaries in the electric utility and natural gas businesses. The company provides electricity to 3.3 million electricity customers and natural gas to 1.8 million customers in eight Midwestern states. Argus lowered shares of Xcel Energy from a "buy" rating to a "hold" rating recently. Jefferies Group did the same and Zack’s is keeping its rating at "hold."
These companies are all very strong and have well defined bullish trends. Yet analysts are downgrading them and some insiders are selling. What can we learn from these actions? Well, it appears that the long run of defensive stocks may be ready to peak the second half of this year.
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