Power Stocks: Value Buys or Value Traps?
power stocks have been in the limelight with power majors like NTPC, Adani Power and Tata Power rising by 14%, 13% and 6.5% in the past one month (July 2023). This surge comes from the simple fact that power stocks have been trading at bargain prices. Therefore, amid the current market scenario, where the broad stock market is trading close to record highs, long-term investors are increasingly finding power stocks appealing.
In addition to being attractively priced, power stocks have a long history of rewarding their shareholders with dividends. The BSE Power index enjoys a dividend yield of 2.27%. NTPC has been a dividend paymaster, clocking in a 5-year average dividend yield of 4.6%.
Tata Power has also been generous to its investors, with a 5-year average dividend yield of 1.7%. Given the current bullish market sentiment, a surge in stock prices of market leaders with a long history of hefty dividends should not come as a surprise. But power stocks have a long history of disappointing investors with a track record of underwhelming results.
The BSE Power Index fell 60% during 2008-2020, due to various reasons. These include overzealous bidding for projects, subdued power demand growth, regulatory interference, excessive borrowing, lack of fuel security, and transmission and distribution losses among others. As a result, stocks in the sector traded at dismally low valuations.
Tata Power traded a 5-year average P/BV of 1.3, NTPC at 1.1x, and Adani Power at 3.1x. However, these stocks have seen recent upgrades and are now trading at a multiple higher than their 5-year averages. Tata Power is trad at 2.6x, NTPC at 1.4x, and Adani Power at 3.6x.
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