Utility Stock-Rate Link Ignores Industry Gains

Rising interest rates have taken too great a toll on shares of utilities, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

“Investors have become overly focused on getting out of income-oriented stocks,” Levkovich wrote in a Sept. 20 report. Utilities have suffered accordingly even though many of their biggest customers are petrochemical companies, which are more competitive because of relatively cheap natural gas, he wrote.

The CHART OF THE DAY tracks the relationship between the Standard & Poor’s 500 Utilities Index and the 10-year Treasury note’s yield since 1990. Levkovich, based in New York, provided a similar chart in his report.

Utilities were this year’s second-worst performers among the S&P 500’s 10 main groups through yesterday. Their industry index rose 8.8 percent, less than half as much as the S&P 500. The worst were telephone companies, the only group to have a dividend yield exceeding the more than 4 percent for utility stocks.

The petrochemical industry has given U.S. utilities more business as shale-gas discoveries hold down the cost of natural gas, Levkovich wrote. At yesterday’s settlement price of $3.602 per million British thermal units, gas was 18 percent cheaper than this year’s high, set on April 19.

Real-estate investment trusts have suffered a similar fate to utilities, the report said. Shares of REITs have fallen even though the yield gap between the stocks’ dividends and 10-year Treasuries isn’t a consistent measure of relative performance, Levkovich wrote. He added that the gauge’s flaws are tied to increases in property values and rents over time.

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