Domestic-focused utility companies are one of the safest investment bets and are often considered substitutes for bonds. Utilities like Sempra Energy SRE, WEC Energy Group WEC and Hawaiian Electric Industries Inc. HE continue to put up a stable performance, which allows them to reward shareholders with regular dividend payments. However, utilities have to adhere to strict regulations, withstand fluctuating weather conditions that impact demand and witness rise in interest rates, which affect these capital-intensive companies.
The Fed raised interest rates from the near-zero level three times till June 2022 that hurt rate-sensitive sectors like Utilities. The Federal Reserve has already increased interest rates by 1.5% this year, taking the benchmark interest rates to 1.5% to 1.75%. To keep inflation under control, the Federal Reserve might further increase rates again this year to nearly 2% by the end of 2022.
Rate increases hurt capital-intensive utilities as their capital servicing cost goes up substantially, thus denting margins and profitability. Utilities with cost discipline, new electric rates , demand improvement through customer growth will perform better, offsetting the negative impact of rate increases.
Per the U.S. Energy Information Administration (EIA), in 2022, U.S. residential, commercial and industrial sector electricity prices are expected at an average of 14.5 cents, 11.85 cents and 7.5 cents per kilowatt hour (KWh), respectively. These rates reflect growth of 5.3%, 5.1% and 3.3%, respectively from 2021. Per EIA, total electricity generation in 2022 is expected to touch 4202.38 billion kWh, improving 2.1% year over year. This is encouraging for utilities as demand and prices per unit are expected to improve in 2022.
At present, it is wise to invest in the following utilities with a favorable Zacks Rank, VGM Score, rising earnings estimates, stable times interest earned ratio and a strong dividend yield.
Price Performance (Six months)
Image Source: Zacks Investment Research
San Diego, CA-based Sempra Energy is involved in the sale, distribution, storage and transportation of electricity and natural gas. Sempra Energy currently has a Zacks Rank #2 (Buy) and a VGM Score of B. For the 2022-2026 period, the company expects to invest $36 billion to further strengthen its infrastructure and operations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Sempra Energy currently has a times interest earned ratio of 1.1, an indicator of its ability to meet its interest burden. The current dividend yield of the company is 3.3% and its long-term (three to five years) earnings growth is pegged at 5.6%. The Zacks Consensus Estimate for 2022 earnings per share has risen 0.5% in the past 60 days. ROE of the company is 11%, better than its industry average of 9.6%.
Milwaukee, WI-based WEC Energy Group is engaged in the generation and distribution of electricity in southeastern, east central and northern Wisconsin, as well as in the upper peninsula of Michigan. WEC Energy currently has a Zacks Rank of #2 and a VGM Score of B. WEC Energy targets a $17.7-billion investment in the 2022-2026 period to strengthen its infrastructure, acquire LNG facilities and add more renewable assets to its portfolio
WEC Energy currently has a times interest earned ratio of 4.4. The current dividend yield of the company is 3.2% and its long-term earnings growth is pegged at 6.1%. The Zacks Consensus Estimate for 2022 earnings per share has moved 1.4% north in the past 60 days. ROE of the company is 12.2%, better than its industry average of 10.4%.
Honolulu-based Hawaiian Electric Industries, along with its subsidiaries, is engaged in electric utility, banking and other businesses operating primarily in the state of Hawaii. Hawaiian Electric currently has a Zacks Rank of #2 and a VGM Score of B.
Hawaiian Electric currently has a times interest earned ratio of 4.4. The current dividend yield of the company is 3.6% and its long-term earnings growth is pegged at 3.2%. The Zacks Consensus Estimate for 2022 earnings per share rise has risen 1.4% in the past 60 days. ROE of the company is 10.7%, better than the industry average of 10.4%.