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US-China Trade War Set to Escalate: 5 Safe Utility Picks

Swarup Gupta
Investing in utilities stocks, which offer lucrative dividends, is a smart option.

Markets endured another volatile day of trading on Oct 29 with the Dow swinging by 900 points over the trading session before closing 200 points lower. The culprit for this reversal was a report that Trump was preparing to impose fresh tariffs on Chinese imports. Both the blue-chip index and the S&P 500 ended perilously short of correction territory. Incidentally, the Nasdaq is already languishing in that zone.

Currently, all of the S&P 500’s sectors are in the red over the past month but for consumer staples and utilities, which leads the pack. Meanwhile, fears that the United States has hit peak earnings are also worrying investors. The Fed’s resolve to push on with rate hikes is another concern. Given this backdrop, investing in utilities stocks, which offer lucrative dividends, is a smart option.

Fresh Tariffs on Chinese Imports Likely

According to a report from Bloomberg, the United States is likely to announce fresh tariffs on Chinese imports in December. These duties will be imposed in case upcoming talks between president Xi and President Trump fail to resolve lingering trade tensions between the two countries. The two leaders are scheduled to meet on the sidelines of a G-20 summit to be held in November at Buenos Aires.

These duties will be imposed on all the remaining Chinese imports, which have not been targeted by earlier rounds of tariffs. According to the report, these tariffs would be imposed on imports worth around $257 billion. Speaking to Fox News late on Monday, Trump said: “I think we will make a great deal with China, and it has to be great because they’ve drained our country.”

Peak Earnings, Rate Hike Worries Grip Markets

Even as U.S.-China trade relations threatened to worsen, markets were gripped with the fear that we are currently witnessing peak earnings. For full-year 2018, total earnings for the S&P 500 index are expected to be up 20.5% on 6.6% higher revenues. For full-year 2019, total earnings are expected to be up 9.9% on 5.2% higher revenues. (Read: Weak Spots in the Earnings Picture)

The projected decline in profit growth in 2019 is primarily being attributed to the absence of the stimulus provided by Trump’s tax cuts. Going by past trends, stocks suffer once an earnings peak has been reached. Per JP Morgan (JPM), stocks outperform bonds for two more months on average after such an event. Such outperformance fails to continue for more than a year after the earnings peak.

Another major concern for investors at this moment is that the Fed’s resolve to continue with monetary tightening could create a liquidity crunch. Some commentators have gone as far as to suggest that its concept of a “neutral rate” is flawed and lacks historical basis. They think the Fed is unwilling to recognize economic realities and fail to appreciate that several sectors will come under duress due to rate increases.

Our Choices

The specter of fresh tariffs is threatening to turn October into an even tougher month for stocks than was first feared. All of the S&P 500’s sectors are in the red over the past month with the exception of consumer staples and utilities. The Utilities Select Sector SPDR is the leading performer over this period, having gained 2.8%.

Investing in utilities stocks, which also offer lucrative dividends, looks prudent. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

National Fuel Gas Company NFG is an integrated energy company, which has natural gas assets located in the prolific Appalachian basin and oil-producing assets in California.

National Fuel Gas’ expected earnings growth for the current year is 2.4%. The Zacks Consensus Estimate for the current year improved by 5% over the last 30 days. The stock has a dividend yield of 3.1%.The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dominion Energy, Inc. D (earlier known as Dominion Resources Inc.) together with its subsidiaries produces and transports energy in the United States.

Dominion Energy has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 15.4%. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days. The stock has a dividend yield of 4.7%.

American Electric Power Co., Inc. AEP is a public utility holding company, which, through directly and indirectly owned subsidiaries, generates, transmits and distributes electricity, natural gas and other commodities.

American Electric Power has a Zacks Rank #2. The company’s expected earnings growth for the current year is 7.6%. The Zacks Consensus Estimate for the current year has improved by 1% over the last 30 days. The stock has a dividend yield of 3.4%.

WEC Energy Group WEC is a diversified holding company, engaged in the generation and distribution of electricity in southeastern, east central and northern Wisconsin, as well as in the upper peninsula of Michigan.

WEC Energy has a Zacks Rank #2. The company’s expected earnings growth for the current year is 6%. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days. The stock has a dividend yield of 3.2%.

Exelon Corporation EXC is a utility services holding company that operates through its subsidiaries – Generation, Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), Pepco Holdings (PHI) and Baltimore Gas and Electric (BGE).

Exelon has a Zacks Rank #2. The company has expected earnings growth of 19.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days. The stock has a dividend yield of 3.2%.

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WEC Energy Group, Inc. (WEC) : Free Stock Analysis Report
 
Dominion Energy Inc. (D) : Free Stock Analysis Report
 
American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report
 
Exelon Corporation (EXC) : Free Stock Analysis Report
 
National Fuel Gas Company (NFG) : Free Stock Analysis Report
 
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