June 29, 2012

Tech vs. Utilities: What’s the Better Value?

Historically, tech has traded at a premium relative to utilities

What’s a better deal? Shares in volatile technology companies or shares in defensive utilities?

The surprising answer is ... a sector that rarely goes on sale compared to the rest of the market.  

Bespoke Investment Group pegs the P/E ratio (trailing 12-monhts) for technology stocks at 14.48 compared to a higher 14.95 valuation for utilities.

Historically, tech has traded at a premium relative to utilities, but as of late, that hasn’t been the case. Only two times in the recent past have utilities traded at a premium to the technology sector: During the 2008-09 financial crisis, and during last summer’s vicious sell-off.

Here’s another thing about the technology sector that’s becoming a larger component of returns: dividends.

For 2012, Moody’s projects tech common dividend payments to approach $26 billion, slightly higher than the almost 11% average annual growth rate of the prior four years. Dividend paying technology companies have kept their aggregate dividend payout ratios at about 20% of discretionary cash flow.

The Technology Sector SPDR (XLK) is already ahead by over 9% year to date compared to a gain of just 1.51% for the Utilities Sector SPDR (XLU).

XLK carries an annual yield of 1.55% and is comprised of titans like Apple, IBM, and Google. XLU’s yield is 3.78 percent and has a gain of 1.52%. Both ETFs charge annual expenses of just 0.18%. Tech payout ratios, while rising, still remain below other industry sectors. That means upside surprises might be ahead.

Which sector would you rather own?  

Through market close of 6/25/12

 

 

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