4 Low-Beta Utility Stocks to Buy Ahead of Fed's Likely Rate Hike
Markets have been upbeat over the past couple of weeks as June inflation data raised hopes that the Fed might soon end its monetary tightening cycle. However, the Fed has already said that two more rate hikes would be required this year as inflation is still elevated.
Market participants are now bracing for a 25-basis point interest rate hike in Fed’s July FOMC scheduled later this week. This has raised concerns once again, with stocks scrambling for direction.
Concerns Resurface
The Fed left interest rates unchanged in June but said that inflation is still elevated and a lot higher than its target range of 2%. This is primarily because the economy is still holding up owing to a resilient labor market.
The Fed has hiked interest rates by 500 basis points since March 2022, and the move appears to be finally working, with June consumer price inflation and producer price inflation both showing a considerable decline from the earlier multi-decade highs.
The consumer price index (CPI) rose 3% in June on a year-over-year basis after rising 4% in May, its slowest level since March 2021. Month over month, CPI rose 0.2%. Core CPI, which excludes volatile food and energy costs, also rose 0.2%.
Year over year, core CPI rose 4.8% in June after hitting a 40-year-high of 9.1% in 2022. The producer price index increased 0.2% in June.
However, the central bank hinted at two more interest rate hikes of 25 basis points each by the end of this year. Investors expect the first of these interest rate hikes to come into effect this week.
Slowing inflation has raised optimism among several market participants that the Fed may end its interest rate hike cycle. Yet, they are awaiting a clearer picture as the central bank officials have been hawkish in their stance.
The Fed has said that the decision on when to stop hiking interest rates depends on economic data as and when it comes.
An increase in interest rates can impact consumer spending behavior, increase borrowing expenses and lead to a slowdown in economic growth. These factors can have a negative effect on the performance of the stock market.
Given the present situation, investing in utility stocks could be a wise decision. The utilities sector is known for its stability and maturity, as demand for essential services it provides tends to remain resilient during fluctuations in the economic cycle. These companies offer critical services like telecommunications, energy, gas and water, which are consistently in demand.
Also, most utilities belong to the category of low-beta stocks (beta greater than 0 but less than 1). The recommended approach is to invest in low-beta equities with a high dividend yield and a favorable Zacks Rank.
Our Choices
We have narrowed our search to four low-beta utility stocks that are regular dividend payers. These stocks have seen positive earnings estimate revisions within the last 60 days. Each of our picks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Consolidated Water Co. Ltd. CWCO, along with its subsidiaries, is involved in the development and operation of seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent. CWCO also focuses on expanding operations in areas having a large proportion of tourist properties and a growing population.
Consolidated Water Co has an expected earnings growth rate of 79.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.1% over the last 60 days. CWCO presently sports a Zacks Rank #1. Consolidated Water Co has a beta of 0.27 and a current dividend yield of 1.63%.
California Water Service Group CWT is one of the largest investor-owned water utilities in the United States. CWT has six subsidiaries — California Water Service, Washington Water Service Company, New Mexico Water Service Company, Hawaii Water Service Company, CWS Utility Services and HWS Utility Services.
California Water Service Group has an expected earnings growth rate of 4.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last 60 days. CWT currently has a Zacks Rank #2. California Water Service Group has a beta of 0.43 and a current dividend yield of 1.94%.
Entergy Corporation ETR is primarily engaged in electric power production and retail distribution of power. ETR has 30,000 megawatt (MW) of generating capacity, including more than 8,000 MW of nuclear fuel capacity.
Entergy Corporation has an expected earnings growth rate of 4.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 60 days. ETR currently has a Zacks Rank #2. Entergy Corporation has a beta of 0.64 and a current dividend yield of 4.12%.
FirstEnergy Corp. FE is a diversified energy company. Through its subsidiaries and affiliates, FE engages in the transmission, distribution and generation of electricity.
FirstEnergy has an expected earnings growth rate of 5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the last 60 days. FE currently has a Zacks Rank #2. FirstEnergy Corp has a beta of 0.45 and a current dividend yield of 3.89%.
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Consolidated Water Co. Ltd. (CWCO) : Free Stock Analysis Report
