Three quality utility stocks to buy now

Utility companies have outperformed the market over the long run, says professional stock picker James Smith. Here, he tips three such stocks to by now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: James Smith, manager of the Premier Global Power & Water Fund.

With investment grade government securities showing increasingly lower yields, it's hard to find attractive assets that offer a decent income. Utilities have often been seen as a reliable source of yield, but the performance of the sector over recent years has been less than spectacular. This is particularly true in Europe, where firms over-extended themselves in years of plenty, leaving them ill-prepared to face tougher times.

That said, in Britain, America and, to a large extent, emerging markets, the power, water and gas sectors have on the whole done well, continuing their longer-term pattern of out-performance. Developing markets are still in the process of completing basic infrastructure, enhancing supply reliability, and ensuring their populations have access to basic amenities.

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In the developed world, governments are beginning to grasp the extent of investment catch up required to renew ageing power generation fleets and to strengthen power grids to cope with the high growth in renewable technologies. Investor aversion to some firms in the sector has left some quality stocks trading at bargain basement valuations. Here are three we currently like.

A rather contrarian investment, and our first recommendation, is EDF (PA: EDF), the French national electricity firm. It's been difficult to invest in for many years, having fallen from a high of more than €80 per share in late 2007 to its current level of below €15.

But dividends have held up well and the stock now yields around 8% and trades on just 7.5 times expected 2013 earnings. A key factor that should underpin dividend sustainability is that EDF pays the French Treasury almost €1.8bn per year in dividend income.

French electricity prices are among Europe's lowest, and there's scope for an increase to help fund the renewal of French nuclear generation assets. In Britain, EDF is negotiating with the government over the terms of the construction and operation of the first new generation of nuclear plants. It appears to us that EDF is the one holding the cards here, and it will need a credible deal to justify a substantial British investment to its 84% shareholder, the French government. That's good news for investors.

Secondly, we've been buyers of Indian power firm OPG Power Ventures (Aim: OPG). India's economy continues to show strong growth and appears to be no closer to solving its basic problem: power demand exceeds supply. By building smaller plants capable of running on either imported or domestic coal and selling at market prices direct to industrial clients (rather than under longer-term power purchase agreements), OPG has sidestepped many of the problems that have dogged this sector.

Lastly, we like Chilean electricity company Enersis (NYSE: ENI), which is an excellent proxy for growth in the Latin American electricity sector. It trades at an attractive valuation and benefits from a broad spread of electricity generation and distribution businesses in Chile, Brazil, Colombia and Peru.

The shares have recently been hit by concerns over the need to raise more capital. That's as a result of the reconstruction of its controlling shareholder's (Endesa of Spain) Latin American assets. But we believe that this has provided an attractive entry point for investors.