Dow Theory's utility trio

by Richard Moroney, editor Dow Theory Forecasts

You might think that utilities are slow-growth, high-yield, defensive stocks. And you’d be right. Most of the time.

Still, investors who assume all utilities are similar risk making poor investment decisions. Here's a look at three members of our Top 15 utility portfolio, each from a different sector of the utility industry.

Diversified utility Sempra Energy (SRE) has delivered impressive growth in the nine months ended September, with sales up 12% and per-share operating earnings up more than 13%.

Sempra provides natural gas to 6.6 million customers and electricity to 1.4 million customers in Southern California but also has a substantial presence in businesses with greater growth opportunities.

Sempra generates nearly one-fourth of its revenue from power-generation and energy operations. Wall Street expects per-share-profit growth of 3% in 2012, a target that sounds conservative.

At just 12 times trailing earnings, 23% below the industry median, Sempra offers growth potential greater than that of most utilities for a bargain price.

With a negative total return of 13% over the last six months, Energen (EGN) has dragged on the Top 15 Utilities portfolio.

Energy stocks as a whole have performed poorly, and energy production accounted for about two-thirds of Energen’s revenue in the 12 months ended September.

However, while energy has weighed on Energen recently, historically it has boosted performance. Over the last 10 years, Energen managed an annualized total return of nearly 18%, more than double the average for the stocks in our Utility Update.

The energy component serves as both a diversification tool and, over the long haul, a growth kicker for the Top 15 portfolio.

Energen is aggressively drilling wells, and it seems capable of topping consensus profi t targets, which call for a decline of 2% in 2012 and annualized growth of 4% over the next five years.

American States Water (AWR) provides water to more than 250,000 customers in Southern California and also operates a much smaller electric utility.

American States’ Quadrix Overall score of 88 is the highest in the sector, and the stock also earns at least 98 in both of our sector-specific scores designed to rank utilities versus other utilities. The company has delivered 10 consecutive years of higher sales.

In the last four quarters, American States delivered 13% growth in both sales and per-share operating earnings, while per-share operating cash flow jumped 33%. Despite that growth, expectations are modest. Wall Street projects roughly flat profits in 2012.

At 16 times trailing earnings, American States trades roughly in line with the average utility but at least 19% below its peer-group median and its three- and five-year average P/E ratios.

Learn more about this financial newsletter at Richard Moroney's Dow Theory Forecasts.