Are utility companies still defensive?

Utility companies used to be seen as some of the safest companies to own on the ASX.

Households must pay their bills or else they will be without heating, electricity and telecommuncations. Therefore, it might be easy to say that Telstra Corporation Ltd (ASX: TLS), TPG Telecom Ltd (ASX: TPM), Vocus Group Ltd (ASX: VOC) and AGL Limited (ASX: AGL) offer investors some of the most defensive earnings on the ASX.

However, the last year has not been good for most of the above companies. Over the last twelve months:

Telstra shares have declined by 18%

TPG shares have declined by 53%

Vocus shares have declined by 58%

AGL shares have increased by 37%

The key thing to remember about the share market is that share prices won’t always be as calm or consistent as earnings and dividends.

TPG has a flawless record of increasing its earnings per share for each of the past eight years, yet the share price has been like a rollercoaster.

It’s important to remember that there are risks with every business and industry. The NBN is changing the telco industry. Global energy prices can swing dramatically year to year, affecting energy retailers.

Time to buy any utility companies?

Of the four I’ve mentioned I think TPG looks like the best buy whilst it’s trading at 12x FY17’s estimated earnings with a grossed-up dividend yield of 3.96%. I think its growth plans with mobile offerings in Australia and Singapore could be a good way to grow the business over the next decade.

Telstra may be the best for dividends in the short-term and Vocus may receive a higher takeover offer, but I’d want both share prices to be 10% lower for a margin of safety before I’d consider buying.

However, at the current prices I would consider buying these growth shares that should give investors far more growth than utility companies.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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