Add These 5 Utilities to Your Portfolio for Long-Term Gains
Volatility has reappeared on Wall Street since August as U.S. stock markets have been witnessing a reversal of the impressive bull run in the first seven months of this year. Markets may remain volatile in the near future. Wall Street is currently in a “Catch 22 situation.”
Weak economic data will indicate that the Fed’s aggressive interest rate hike policy for one and half years has started bearing fruits. On the other hand, this will also indicate a slowdown in economic activities.
At this stage, it should be prudent to invest in defensive stocks like utilities with a favorable Zacks Rank to strengthen your portfolio. Out of the 11 broad sectors of the S&P 500 Index, the Utilities Select Sector SPDR (XLU) suffered the most in 2023 as market participants’ thrust shifted from defensive to growth/momentum stocks. Year to date, XLU has plunged 19.5%. This also indicates that utility stocks are currently available at an attractive valuation.
Utilities Immune to Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. Such companies provide basic services like electricity, gas, water and telecommunications, which are always in demand.
Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
Utility companies enjoy a reputation for being safe given the regulated nature of their business. This lends their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues.
Additionally, utilities are generally low-beta stocks (beta >0 but <1). At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have seen positive earnings estimate revisions within the last 60 days and have good potential for the rest of 2023 and 2024. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
American Water Works Co. Inc. AWK is gaining from the implementation of new water systems and contributions from military contracts. Investments to upgrade its infrastructure will allow AWK to provide quality services to its expanding customer base. AWK continues to expand operations through organic and inorganic initiatives. Cost management is boosting margins. Our model projects an increase in revenues for the 2023-2025 period.
American Water Works Co. has an expected revenue and earnings growth rate of 2.6% and 6.6%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 0.2% over the last 60 days. AWK has a beta of 0.60 and a current dividend yield of 2.42%.
Vistra Corp. VST operates as an integrated retail electricity and power generation company. VST operates through six segments: Retail, Texas, East, West, Sunset, and Asset Closure. VST is involved in electricity generation, wholesale energy purchases and sales, commodity risk management, fuel production, and fuel logistics management activities. VST retails electricity and natural gas to residential, commercial, and industrial customers across 20 states in the United States and the District of Columbia.
Vistra has an expected revenue and earnings growth rate of 7.5% and 23.9%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 2.1% over the last 30 days. VST has a beta of 0.94 and a current dividend yield of 2.58%.
Pinnacle West Capital Corp.’s PNW ongoing capital investment will make its generation portfolio clean, fortify its infrastructure and allow it to meet demands from an expanding customer base. PNW aims to achieve the zero-emission target by 2050. PNW’s cost savings initiatives will keep the utility service rates low for customers.
Pinnacle West Capital has an expected revenue and earnings growth rate of 4.8% and 17%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 0.2% over the last 30 days. PNW has a beta of 0.49 and a current dividend yield of 4.81%.
OGE Energy Corp. OGE is the largest electric utility in Oklahoma, with an aggressive investment plan worth $4.75 billion during 2023-2027 to upgrade its infrastructure and provide seamless services to its customers. Apart from bolstering customer growth, such investment strategies will also enable OGE to continue to grow its dividend. Our model suggests earnings growth of 5.7% over the 2024-2025 period for OGE.
OGE Energy has an expected revenue and earnings growth rate of 9.7% and 5.1%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 4.7% over the last 60 days. OGE has a beta of 0.72 and a current dividend yield of 5.13%.
The Southern Co. SO has outperformed its peers leveraging the demographics of its operating territories. Buoyed by healthy population and job growth, SO has gradually expanded its customer base. With solid rate base growth and constructive regulation, SO is expected to generate steady earnings and dividend growth in the coming years.
The Southern Co. has an expected revenue and earnings growth rate of 5.6% and 11.5%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 0.1% over the last 30 days. SO has a beta of 0.53 and a current dividend yield of 4.37%.
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Southern Company (The) (SO) : Free Stock Analysis Report
OGE Energy Corporation (OGE) : Free Stock Analysis Report
Pinnacle West Capital Corporation (PNW) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Vistra Corp. (VST) : Free Stock Analysis Report
