Morningstar Advisor - October/November 2013 - (Page 68)

Screens Utilizing Utilities’ Total Return By John Zecy These bargains offer robust dividends and room for price appreciation. With the S&P 500 breaking 1,700 points in August to reach its all-time high, some investors are becoming skeptical of the market’s capacity for capital appreciation and are favoring dividend-rich stocks. Nevertheless, we think the outlook for equity markets is still promising over a longer time horizon with pockets of undervaluation available for investors to realize healthy returns. That said, we decided to please both tastes by running a screen for regulated utilities. In addition to the sector’s traditionally robust dividend yields, we have identified a few bargains that can provide investors with some sizeable price appreciation. 68 Morningstar Advisor October/November 2013 Sector  Utilities And ( Economic Moat  Narrow Or  Wide Economic Moat ) At Morningstar, we assign a firm an economic moat rating based on two primary attributes: the prospect of earning above-average returns on capital and a competitive edge that prevents these returns from quickly eroding, earned through high switching costs, a cost advantage, intangible assets, a network effect, or efficient scale. We primarily award economic moats to regulated utilities that enjoy an efficient scale effect with a difficult-to-replicate infrastructure network that delivers essential sources of electricity and natural gas. Federal and state laws tend to grant significant protection that develops these firms into natural monopolies, which in turn ensures an economically efficient energy delivery system. While these regulations also largely determine utilities’ returns, they are set at a level that aims to keep customer costs low while providing adequate returns for capital providers. These implicit contracts between regulators and the utility should, in the long run, allow the firm to earn its cost of capital. And Morningstar Rating Overall > 4 While a utility company may display strong competitive advantages, we want to ensure that the market has not overpriced it relative to what we believe is its fair market value. For this we used the Morningstar

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Contents
Contributors
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013