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Mixed Q2 Earnings Results Put Utility ETFs in Focus

Sweta Jaiswal, FRM

The utility sector has come up with mixed results so far this reporting season. Of the 42.9% S&P industrial companies that have reported, 58.3% beat on the bottom line while 16.7% surpassed revenue estimates. Earnings have declined 0.4% while revenues increased 0.4% year over year, per the Earnings Trends issued on Jul 31 (read: 5 Sector ETFs That Crushed the Market in July).

The utility sector is a great investment area for those seeking yields and safety for the long term. It acts as a safe haven during erratic stock market conditions. Escalating trade war tensions between the United States and China, geopolitical tensions and global economic slowdown have been making jumpy investors flee to such defensive options.  Resultantly, the S&P 500 Utilities (Sector) index has gained 13.3% year to date. However, it should be avoided by those looking for market-beating returns (read: Grab These Safe Haven ETFs Amid Intensifying Trade Spat).

Against this backdrop, we take a look at some big industrial earnings releases and see if these can leave an impact on ETFs exposed to the space.

Inside the Earnings Results 

On Jul 24, NextEra Energy NEE delivered second-quarter 2019 adjusted earnings of $2.35 per share, surpassing the Zacks Consensus Estimate of $2.28 by 3.1%. The earnings growth was led by strength across all business segments. Moreover, the reported earnings were up 12.9% on a year-over-year basis. In the quarter, operating revenues totaled $4.97 billion, beating the Zacks Consensus Estimate of $4.76 billion by 4.4%. Moreover, revenues improved 22.3% year over year.

The company restated its 2019 adjusted earnings guidance at the range of $8.00-$8.50. NextEra’s earnings are expected to grow at a compound annual rate of 6-8% per year through 2021, off its base of $7.70 in 2018. NextEra continues to expect 2020 adjusted earnings per share in the range of $8.70-$9.20. The stock has gained around 2% since the earnings release (as of Aug 6).

On Jul 31, Dominion Energy D delivered second-quarter 2019 operating earnings of 77 cents per share, outpacing the Zacks Consensus Estimate of 75 cents by 2.6%. Operating earnings per share were within the company’s guided range of 70-80 cents. Strength in the Southeast Energy and Power Delivery businesses along with favorable weather conditions were major drivers for second-quarter earnings. Total revenues were $3.97 billion, missing the consensus estimate of $4.09 billion by 2.8% but improving 28.9% from $3.08 billion a year ago.

For 2019, Dominion expects earnings per share in the range of $4.05-$4.40 compared with $4.05 recorded in 2018. For third-quarter 2019, the company expects operating earnings per share within $1.00-$1.20. The stock has gained around 0.3% since the earnings release (as of Aug 6).

On Aug 6, Duke Energy Corporation DUK reported second-quarter 2019 earnings per share of $1.12, which beat the Zacks Consensus Estimate of 98 cents by 14.3%. In fact, the bottom line improved 57.7% year over year on revenue as well as operating income growth. Total operating revenues came in at $5.88 billion, up 4.1% from $5.64 billion a year ago. Moreover, the reported figure surpassed the Zacks Consensus Estimate of $5.69 billion by 3.3%.

Duke Energy reiterated its earnings guidance for 2019 at $4.80-$5.20. The stock has gained around 2.3% since the earnings release (as of Aug 6).

Utility ETFs in Focus

In the current scenario, we believe it is prudent to discuss the following ETFs that have relatively high exposure to the utility companies discussed (see: all the Utilities/Infrastructure ETFs).

Utilities Select Sector SPDR Fund XLU                           

The fund tracks the Utilities Select Sector Index. It comprises 28 holdings with the above-mentioned companies carrying 27.64% weight. Its AUM is $10.08 billion and expense ratio is 0.13%. The fund has gained 13.4% year to date and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETF Predictions for a Historically Low August).

Vanguard Utilities ETF VPU

The fund tracks the MSCI US Investable Market Utilities 25/50 Index and includes stocks of companies that distribute electricity, water, or gas, or that operate as independent power producers. It comprises 69 holdings with the above-mentioned companies constituting 23.8%. Its AUM is $3.82 billion and expense ratio is 0.10%. It has gained 13.2% year to date and carries a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 Unbeatable ETF Strategies for 2nd Half).

 iShares U.S. Utilities ETF IDU

The fund tracks the Dow Jones U.S. Utilities Index, providing exposure to U.S. companies that supply electricity, gas, and water. It comprises 48 holdings with the above-mentioned companies constituting 24.83%. Its AUM is $844.4 million and expense ratio is 0.43%. It has gained 12.6% year to date. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook.

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Duke Energy Corporation (DUK) : Free Stock Analysis Report
 
Dominion Energy Inc. (D) : Free Stock Analysis Report
 
NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
 
Vanguard Utilities ETF (VPU): ETF Research Reports
 
Utilities Select Sector SPDR Fund (XLU): ETF Research Reports
 
iShares U.S. Utilities ETF (IDU): ETF Research Reports
 
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