The utility sector is fundamentally strong and incredibly mature. Utility has maintained a consistent performance, braving market volatility which generally impacts most sectors. The steady performance over the years has been primarily driven by unswerving demand for basic utility services like electricity, gas and water despite economic downturns. In fact, this helps utility companies to consistently boost shareholder value through dividend payouts and share buybacks
The regulated nature of businesses renders a high level of stability to the Utility space. Further, steady dividend yields reduce the chances of price depreciation. However, it’s worth mentioning that the regular dividend payments to some extent lower the price growth potential.
While the continuation of the Trump effect helped the S&P 500 gain 5.5% in the first quarter of 2017, the index lost 0.3% in the first week of April. Does this indicate that the Trump rally has started losing steam? Also, sectors including Aerospace and Medical, which recorded earnings growth in the fourth quarter of 2016, are expected to see an earnings decline in the first quarter of 2017. This may lead to sluggishness in the market.
Read more in our weekly Earnings Preview report.
What Can Trigger Volatility?
During the pre-election campaign, Trump had said that he will make regulatory changes for certain industries and bring down the corporate profit tax rate. However, Trump has not been successful in making any notable regulatory changes so far. In fact, he failed to repeal the Obamacare.
Failure to repeal the Obamacare has created doubts in the mind of investors about Trump’s ability to act on his pre-electoral promises. The upcoming election in France and Germany could lead to more chaos in the European Union. Since the U.S. does not operate in isolation in the global market, lower-than-expected performance by the developing economies will mar the prospects in the U.S.
As these issues in the domestic and international markets gradually unfold, it could trigger volatility in the U.S. markets and wipe out the gains registered so far in the last few months.
Given the uncertain market scenario and the possibility of increased volatility, we picked up some safe and steady utility stocks.
Criteria for Selection
For selecting the right utilities, we fall back on our style score system. This score allows investors to eliminate the negative aspects of stocks and pick winners. Our research shows that utilities with a Value Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the investing space.
In addition to focusing on stocks with the combination of top Zacks Rank and favorable value score, we have picked those that offer better-than-industry dividend yield.
Our Utility Picks
Houston, TX-based CenterPoint Energy Inc. CNP is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. Over the past 60 days, the Zacks Consensus Estimate for 2017 earnings climbed 1.6% to $1.29 per share. The stock currently has a Zacks Rank #2 and a Value Style Score of ‘B.’
The stock’s present dividend yield is 3.84%, way better than the Utility – Electric Power industry average of 3.55%. The long-term earnings growth rate is currently at 5.00%.
Based in Essen, Germany, E.ON SE EONGY provides power and gas distribution networks and related services. The company generates energy from renewable as well as bio energy sources. The Zacks Consensus Estimate for 2017 earnings rose 12.3% to 64 cents per share over the last 60 days. The stock currently has a Zacks Rank #2 and a Value Style Score of ‘A.’
The stock’s present dividend yield is 5.28%, more than the industry average. The long-term earnings growth rate is pegged at 8.80%.
Based in Madrid, Spain, Telefonica S.A. TEF provides fixed-line telephone services, wireless communications, Internet access, video and data transmission services, to approximately 313 million customers. Over the past 60 days, the Zacks Consensus Estimate for 2017 earnings increased 10.7% to 83 cents per share. The stock has a Value Style Score of ‘B’ and currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock’s present dividend yield is 6.94%, higher than the Diversified Communication Services industry average of 2.55%.The long-term earnings growth rate is pegged at 55.77% at the moment.
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CenterPoint Energy, Inc. (CNP): Free Stock Analysis Report
Telefonica SA (TEF): Free Stock Analysis Report
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