Domestic-focused Utilities continue to perform steadily as the demand for utility services hardly fluctuate with the vagaries of economy. Cost control, new electric rates and customer growth continue to help the utility sector maintain operational stability.
Utility operation is capital intensive as consistent investment is required to upgrade, maintain and replace older wires, electric poles, as well as power stations. Hence, apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgrades.
Utilities are traditionally averse to interest rate hikes. The Federal Reserve increased interest rates once more this year by 0.25% to the range of 2.25-2.5%, marking the fourth hike in 2018. The reasons behind the rate revision were ongoing strength in the U.S. economy, low and stable inflation, consistent job addition, unemployment rate falling to historical lows, along with an upward revision in wages.
Utilities a Safe Haven
Despite slower-than-expected GDP growth projection from the Fed, utilities can still be banked upon due to their ability to pay regular dividend and deliver consistent performance.
The Fed now expects GDP growth of 2.3% for 2019, lower than the earlier expectation of 2.5%. The cautious approach of the Fed takes into consideration the lower-than-expected development in global economy, uncertainty surrounding the U.S.-China trade dispute and impact on the global economy post U.K.’s exit from European Union.
While interest rates have been hiked four times this year, the S&P 500 Utilities have returned 0.75% in the past 12 months against S&P 500 group’s decline of 8%. The cautious Fed Chair Jerome Powell reduced rate hike possibilities for 2019 to two from earlier expectation of three, which is indeed good news for the utility space.
Per a projection from the U.S. Energy Information Administration (“EIA”), retail prices of electricity will continue to increase at all customer segments, which is a way of boosting the utilities’ top-line growth.
In 2019, earnings from the Utilities sector are expected to improve 4.7% on 3% improvement in revenues. (For more details refer to our weekly Earnings Trends)
Selecting the Utilities
We have picked a few stocks carrying a Zacks Rank of either #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Each of the utilities mentioned below has a market capitalization of more than $1 billion and reported average positive surprise in the last four quarters. In addition, the Zacks Earnings Estimate for these utilities has shown an upward revision in the past 30 days.
All the utilities have outperformed the Zacks S&P 500 Composite in the past 12 months and offer regular dividend yield to their shareholders.
NextEra Energy Inc. NEE is based in Juno Beach, FL. This public utility holding company is engaged in the generation, transmission, distribution and sale of electric energy. The long-term (3-5 years) earnings growth of this utility is pegged at 8.65%. The company’s current dividend yield of 2.61% is better than the S&P 500 group’s 2.16%.
NextEra Energy pulled off average positive earnings surprise of 1.7% in the last four quarters. Its earnings estimates for 2018 and 2019 have increased 0.7% and 0.7%, respectively, in the past 30 days.
Sempra Energy SRE is a southern California-based energy services holding company involved in the sale, distribution, storage, as well as transportation of electricity and natural gas. The long-term earnings growth of this utility is projected at 8.12%. The company’s current dividend yield of 3.32% is better than the S&P 500 group’s 2.16%.
Sempra Energy pulled off average positive earnings surprise of 4.97% in the last four quarters. Its earnings estimates for 2018 and 2019 have increased 0.3% and 0.26%, respectively, in the past 30 days.
One Year Price Performance
Eversource Energy ES is based in Springfield, MA. It transmits and delivers electricity and natural gas to more than 3.7 million residential, commercial and industrial customers in Connecticut, New Hampshire and Massachusetts. The long-term earnings growth of this utility is expected at 5.91%. The company’s current dividend yield of 3.14% is better than the S&P 500 group’s 2.16%.
Eversource Energy pulled off average positive earnings surprise of 1.42% in the last four quarters. Its earnings estimates for 2018 and 2019 have increased 0.1% and 0.15%, respectively, in the past 30 days.
Atmos Energy Corporation ATO is based in Dedham, MA. The company serves in excess of three million natural gas distribution customers in more than 1,400 communities across eight states from the Blue Ridge Mountains in the East to the Rocky Mountains in the West. The long-term earnings growth of this utility is estimated at 6.5%. The company’s current dividend yield of 2.33% is better than the S&P 500 group’s 2.16%.
Atmos Energy delivered average positive earnings surprise of 7.42% in the last four quarters. Its earnings estimates for 2018 and 2019 have increased 0.19% and 0.07%, respectively, in the past 30 days.
American Water Works Company AWK is based in Camden, NJ. The company provides essential water services to more than 15 million customers in 47 states, the District of Columbia and Ontario, Canada. The long-term earnings growth of this utility is predicted at 7.79%.
American Water Works pulled off average positive earnings surprise of 4.44% in the last four quarters. Its earnings estimates for 2018 and 2019 have increased 0.1% and 0.45%, respectively, in the past 30 days.
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NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
Sempra Energy (SRE) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Eversource Energy (ES) : Free Stock Analysis Report
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