Cohen & Steers Utility Fund at Full Power

Utilities, traditionally a low-key source of dividends, have been churning out electrifying returns. Over the past year to May 1, the average utility fund rocketed 32%. Over the past three years, the average annualized gain was 23%.

Robert Becker, manager of the Cohen & Steers Utility fund, says the rally has plenty of more juice left. That's because the supply of pipelines and power plants hasn't kept pace with the growing demand for electricity. "There is a huge amount of catch-up investments being made, and that's leading to substantial earnings growth for utilities," says Becker, who has led the Cohen & Steers fund since its May 2004 inception. A jolt of merger activity has also given utilities a boost.

Cohen & Steers Utility has outpaced two-thirds of its peers over the past year through May 21, with a whopping 43% return (since its inception, it has gained an annualized 25%.) Becker says the fund (symbol CSUAX; 4.50% sales charge on the class A shares) is currently positioned to benefit from the rising values of power plants. "The value of these assets is increasing, given that it's increasingly difficult to build new plants due to growing environmental concerns," he says.

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Nearly half of the 41-stock fund is invested in pure electric utilities. Occupying 5% of the fund recently was Exelon (EXC), the largest operator of nuclear power plants. Compared with coal-fired plants, atomic plants are cleaner and cheaper to operate, making nuclear energy an attractive investment. Exelon's fleet of 17 atomic reactors gives it an advantage over the droves of utilities that operate only coal-fired plants. The $90 million fund, which currently yields 1.7% (2% is typical for utility funds nowadays), also recently held large positions in Entergy (ETR), FPL Group (FPL) and TXU (TXU).

The typical electric utility now has a price-earnings ratio about equal to that of Standard & Poor's 500-stock index. Utility P/Es used to be lower than that of the S&P 500, but that was when utilities were simple income stocks. Now that the industry is engaged in massive construction of new infrastructure, the case for growth is strong, says Becker. "Whether they'll continue at the same pace is tough to say, but utilities are still well positioned." Cohen & Steers expects the industry's earnings to grow 11% in 2007.