The Federal Reserve acted as expected and kept the interest rate unchanged at 2.25% to 2.5% in the first half of 2019.
Why Fed Changed its View?
After raising rates nine times since December 2015, the Federal Reserve decided to take a cautious approach on rate hikes. The ongoing trade dispute with China, data pointing toward a softening economy and inflation rate below the committee’s 2% target are the primary reasons for the rate freeze. In fact, these could even lead to a rate cut, per Fed Chair Jerome Powell, who backed the central bank’s decision with an intention “to sustain the economic expansion, with a strong job market and stable prices, for the benefit of the American people.”
Powell added that given the prevailing uncertainties and subdued inflation pressures, the Fed will observe the implications of all new information for the economic outlook and “will act as appropriate to sustain the expansion, with a strong labor market and inflation near its 2% objective.”
Inflation is expected to be about 1% in 2019, 1.9% in 2020 and 2% in 2021. According to Powell, “Inflation has been running somewhat below our objective, but we have expected it to pick up, supported by solid growth and a strong job market.”
Possibility of Rate Cuts, Welcome Change for Utility
Rate hikes are welcomed by some sectors like Banking in anticipation of higher interest income. But the capital-intensive Utility sector might cringe at the thought of it for it takes recourse to external sources of financing to meet its capital requirements. In a way, the interest rate freeze lowers this sector’s cost of capital allowing it to continue with capital intensive infrastructural development work.
Fed officials kept the 2019 interest rate at 2.4%, unchanged from its March FOMC meeting. However, interest rate projection for 2020 and 2021 has been revised down. The rate is now projected at 2.1% down from 2.6% for 2020, and 2.4% versus 2.6% expected earlier for 2021. The same should be 2.5% over the long haul, down from the 2.8% forecast made at the meeting held in March. This development will certainly benefit the cause of utility companies.
Our Earnings Outlook report indicates that Utility sector earnings will improve 2.5% in the second quarter of 2019 on the back of a 2.5% improvement in total revenues.
4 Utility Stocks in Focus
Against such a macro backdrop, investors may like to focus on utility stocks with strong fundamentals and provide steady returns to investors.
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The year-to-date returns of these companies were better than the Zacks S&P 500 composite’s return of 15.1%, and dividend yield is better than Zacks S&P 500 composite’s yield of 1.92%.
Sioux Falls, SD based NorthWestern Corporation NWE provides electricity and natural gas to various groups of customers. The long-term (3 to 5 years) earnings growth of this utility is 3.03%.
This Zacks Rank #1 (Strong Buy) stock has a dividend yield of 3.16%. The company pulled off an average positive earnings surprise of 18.74% in the last four quarters. Its earnings estimate for 2019 has increased 6.2% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Year-to-date Price Performance
Minneapolis, MN-based Xcel Energy Inc. XEL along with its subsidiaries is involved in utility operations. The company operates in eight states. The long-term (3 to 5 years) earnings growth of this utility is 5.61%.
This Zacks Rank #3 (Hold) stock has a dividend yield of 2.66%. The company pulled off an average positive earnings surprise of 2.15% in the last four quarters. Its earnings estimate for 2019 has increased 0.4% in the past 60 days.
Columbus, OH-based American Electric Power Company AEP through directly and indirectly owned subsidiaries, generates, transmits and distributes electricity, natural gas and other commodities. The long-term (3 to 5 years) earnings growth of this utility is 5.65%.
This Zacks Rank #3 stock has a dividend yield of 2.97%. The company has an average positive earnings surprise of 6.15% for the trailing four quarters. Its earnings estimate for 2019 has increased 0.5% in the past 60 days.
Atlanta, GA-based Southern Company SO is one of the largest utilities in the United States. The company deals with the generation, transmission and distribution of electricity. The long-term (3 to 5 years) earnings growth of this utility is 4.50%.
This Zacks Rank #3 stock has a dividend yield of 4.33%. The company delivered an average positive earnings surprise of 6.66% in the last four quarters.
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American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report
Xcel Energy Inc. (XEL) : Free Stock Analysis Report
Southern Company (The) (SO) : Free Stock Analysis Report
NorthWestern Corporation (NWE) : Free Stock Analysis Report
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