UBS Has 4 Quality High-Yielding Utility Stocks to Buy Now

One sector that absolutely rolled during the quantitative easing (QE) days was the utility sector. Like other equities that are considered bond proxies because of their yield, the staid old sector, usually relegated to the proverbial widows and orphans portfolios, caught fire. However, with the end of QE and the market acknowledging that interest rate increases are on the way, the sector has faced headwinds this year.

In a new report, UBS thinks that third-quarter earnings reports for the sector leaders could come in strong and that disappointments will be at a minimum. The UBS team notes that with the EPA’s Clean Power Plan (CPP) only finalized in the latest quarter, they see CPP as the single most important rule revision since the Mercury and Air Toxics Standards.

We screened the UBS universe of utility stocks for top-yielding companies rated Buy, and found four that look very attractive now. Two have had their price targets increased recently.

Dominion Resources

Many of the Wall Street firms that we cover are becoming more positive on utilities again after this year’s underperformance, and this top stock also resides in the UBS Quality Growth at a Reasonable Price portfolio. Dominion Resources Inc. (NYSE: D) is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 24,600 megawatts of generation and 6,455 miles of electric transmission lines. Dominion operates one of the nation’s largest natural gas storage systems, with 928 billion cubic feet of storage capacity, and serves utility and retail energy customers in 13 states.

Dominion investors are paid a solid 3.65% dividend. The UBS price target for the stock is raised to $77 from $75. The Thomson/First Call consensus price target is $79.29. The stock closed Thursday at $72.80.

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DTE Energy

With the potential for another cold winter on tap, this company may look to extending 2015 gains into next year. DTE Energy Inc. (NYSE: DTE) is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide. Its operating units include an electric utility serving 2.1 million customers in Southeastern Michigan and a natural gas utility serving 1.2 million customers in Michigan. The DTE Energy portfolio includes non-utility energy businesses focused on power and industrial projects, natural gas pipelines, gathering and storage and energy marketing and trading.

The company raised the dividend by almost 6% this past summer, and the surging growth and revitalization in Detroit after years of decline could also be helping to increase demand.

DTE shareholders are paid a very solid 3.6% dividend. The UBS price target is $93. The consensus number is at $86.36, and the stock closed Thursday at $83.26.

Hannon Armstrong

This is another solid value at current levels. Hannon Armstrong Sustainable Infrastructure Capital Inc. (NYSE: HASI) provides debt and equity financing to the energy efficiency and renewable energy markets. It is structured as a real estate investment trust (REIT) and focuses on providing preferred or senior level capital to established sponsors and high credit quality obligors for assets that generate long-term, recurring and predictable cash flows.

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The UBS team views the company as a specialty finance play on the growth of energy efficiency and renewables with a very strong management team, a differentiated investment strategy, an impressive and increasing deal pipeline and a track record of earnings and dividend growth. The company also added to its available capital with a recent 5 million share offering.

Hannon investors are paid a large 5.75% distribution. The UBS price target is $22, while the consensus target is $22.42. The shares closed Thursday at $18.13.

PPL

This is another utility the UBS team prefers, and it beat second-quarter earnings expectations but came in a little light on the revenue side. PPL Corp. (NYSE: PPL) serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties, as well as 543,000 customers in 77 Kentucky counties and five counties in Virginia.

The company also provides electric delivery services to approximately 1.4 million customers in Pennsylvania and operates electricity distribution network for the Midlands, South West and Wales in the United Kingdom. In addition, it offers a range of customer-care and back-office services to competitive retail energy suppliers, including customer enrollments; contract management; electronic data exchange; simple and complex billing; and call center operations comprising telemarketing, payment processing and collections of overdue accounts.

PPL is another of the leading U.S. utility companies that plans to continue to increase regulated operations and lower earnings volatility attached to competitive operations. It raised cash and lowered debt late last year by selling some hydroelectric assets to NorthWestern energy.

PPL investors receive a solid dividend, which comes in at a generous 4.48%. The UBS price target is raised to $36 from $33, and the consensus target is higher at $34.69. PPL closed Thursday at $34.19.

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The huge capital gains for the sector from the QE days may be in the rear-view mirror, but even when rate increases start to hit the tape, they will be small and very slow. These top stocks make excellent additions to growth and income total return portfolios.

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