As expected, the Federal Reserve announced another round of interest rate cut in yesterday’s meeting. The central bank cut interest rate by 25 basis points and lowered the federal funds rate to 1.75% to 2%. The rate cut comes despite increase in household spending. The recent interest rate cut considers the uncertainties that still prevail in the U.S. economy. In addition, the ongoing trade dispute between the United States and China has also added to the uncertainty.
After raising interest rates nine times since December 2015 from a near zero level, the Federal Reserve finally cut rates in July 2019, citing weakness in the economy. The back-to-back interest rate cut reflects the fact that the U.S. economy is yet to show signs of stability. The Fed members considered the weakness in business fixed investment and exports while reducing rates.
Rate hikes are welcomed by some sectors like banking in anticipation of higher interest income. Capital intensive, highly levered utility stocks gain from rate cuts as these lower cost of capital. The decline in rate enables utilities to source funds at a cheaper rate, continue with infrastructure upgrade and pay out regular dividend to shareholders.
Are More Cuts on the Way?
Per Trading Economies, the U.S. economy grew by an annualized 2% in the second quarter of 2019, down from 3.1% expansion in the first quarter. The Fed expects U.S. GDP to increase by 2.2% in 2019 and 1.9% in 2021, up marginally from its earlier projection of 2.1% and 1.8% respectively. However, for 2020 GDP is expected to remain unchanged at 2%.
The Fed also provided an updated view on unemployment. Fed officials expect the unemployment rate at 3.7% for 2019, up from 3.6% expected at its June meeting. For 2020 and 2021, the projected unemployment rate remains unchanged at 3.7% and 3.8%, respectively. In the long term, unemployment is estimated to be 4.2%, unchanged from June expectation.
Taking into consideration the above factors Fed officials expect 2019 interest rate at 1.9%, down from the June projection of 2.4%. For 2020 and 2021 rates are expected to drop to 1.9% and 2.1% from 2.1% and 2.4%, respectively, projected in the June meeting. These projections indicate that we might see further rate cuts but not in the immediate quarters.
Utilities Remain Attractive
It’s an intimidating task to zero in on stocks with strong potential. The Zacks Stock Screener makes this work relatively simpler. We have selected four utilities, carrying a Zacks Rank #2 (Buy) and with return on equity (ROE) on a trailing twelve months (TTM) basis better than the sector’s 10.24%. All stocks returned higher than the S&P 500 group in the last month.
The AES Corporation AES is a global utility company with a customer base of nearly 2.4 million. This Zacks Rank #2 company has a current dividend yield of 3.4% and a ROE TTM of 18.94%. Current-year earnings estimates have moved up by 0.8% in past 90 days. Long-term earnings growth rate for the company is pegged at 8.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MDU Resources Group, Inc. MDU is a utility natural gas distribution company. It provides value-added natural resource products and related services that are essential for energy transportation, regulated energy delivery and construction materials and services business.
The company has a current dividend yield of 2.9% and a ROE TTM of 11.11%. Current-year earnings estimates have moved up 0.7% in the past 90 days. Long-term earnings growth of the company is projected to be 7.1%.
Price Performance vs S&P 500 (One Month)
American States Water Company AWR, along with its subsidiaries, provides fresh water, wastewater services and electricity to its customers in the United States.
The company has a current dividend yield of 1.34% and a ROE TTM of 11.11%. Current-year earnings estimates have moved up 6% in the past 90 days. Long-term earnings growth of the company is projected to be 8%.
PPL Corporation PPL is a diversified utility holding company that serves 10 million utility customers in the United States and United Kingdom. The company is going to invest nearly $15 billion through 2019-2023 to strengthen its grid, expand renewable generation capacity and focus on new technology to serve customers more efficiently.
The company has a current dividend yield of 5.29% and a ROE TTM of 14.57%. Current-year earnings estimates have moved up 0.4% in the past 90 days.
5 Stocks Set to Double
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The AES Corporation (AES) : Free Stock Analysis Report
PPL Corporation (PPL) : Free Stock Analysis Report
MDU Resources Group, Inc. (MDU) : Free Stock Analysis Report
American States Water Company (AWR) : Free Stock Analysis Report
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