Although utilities companies are very expensive on many metrics compared to the broader market, they offer attractive dividend yields and are more predictable buys for investors because of their regulated business models, one managing director said.
"Those dividend yields just look very attractive and remember the business models are much more predictable because most of them are regulated and so the dividends and prospective growth in those dividends is seen as much more achievable and, therefore, there's a lower risk profile with that," said Greg Gordon, senior managing director and head of utilities research at ISI.
As natural gas prices have decreased recently, electric utility rates have followed suit — a drop that utilities have profited from, Gordon said.
"You've been in this sweet spot where utilities have been able to grow their earnings by investing more in their earnings," he said. "At the same time, customers' rates haven't gone up."
Gordon added that there are not many power plants being built because the economy's sluggishness has resulted in excess capacity.
Two of Gordon's top picks in the utilities sector are Exelon and American Electric Power .
Exelon, which offers a 5 percent dividend yield, owns both regulated and merchant power assets, Gordon said. He placed a $48 price target on the company and forecast "reasonably good earnings growth" for the company next year.
Gordon called American Electric "a stock you have to own" and one that could generate 3 to 5 percent earnings growth per year.
He added that fear about the company's future earnings growth due to upcoming tougher EPA standards was causing the stock to discount flat earnings growth for the next five years.
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Disclosure information was not available for Greg Gordon or his company.