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Utility ETFs in Focus on Mixed Q1 Earnings

Sweta Jaiswal, FRM
BlackRock has pointed out five megatrends that are here to stay. These ETFs revolve around these emerging themes.

The utility sector has come up with mixed results so far this earnings season. Of the 89.3% S&P industrial companies that have reported, 48% beat on the bottom line while 56% surpassed revenue estimates. Earnings have risen 4.4% and revenues have declined 0.7% year over year, per the Earnings Trends issued on May 1 (read: 5 Top-Ranked Stocks in S&P 500 ETF Up More Than 50%).

 The S&P 500 Utilities (Sector) index has lost 1.4% since Apr 30 (as of May 10). However, the utility sector is a great investment area for those seeking yields and safety. However, it should be avoided by those eyeing market-beating returns. It is among the most stable sectors for the long term as its players are likely to offer decent returns. The sector acts as a safe haven during erratic stock market conditions. Escalating trade war tensions between the United States and China have been making jumpy investors flee to such defensive options. 

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 Apr 23, NextEra Energy NEE reported first-quarter 2019 adjusted earnings of $2.20 per share, beating the Zacks Consensus Estimate of $2.01 by 9.4%. Moreover, earnings rose 12.2% on a year-over-year basis led by strength across all business segments. In the quarter, operating revenues totaled $4.08 billion, lagging the Zacks Consensus Estimate of $4.11 billion by 0.8%. However, revenues improved 5.6% year over year.

The company reiterated its adjusted earnings guidance at the range of $8.00-$8.50 for 2019. Earnings are expected to see 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.

On May 3, Dominion Energy D reported first-quarter 2019 operating earnings of $1.10 per share, lagging the Zacks Consensus Estimate of $1.12 by 1.8%. However, operating earnings were within the company’s guided range of $1.05-$1.25. The reported figure was 3.5% lower than the year-ago quarter. The year-over-year drop was due to very mild weather in Virginia and South Carolina, which dented earnings by six cents. Total revenues came in at $3.86 billion, lagging the consensus estimate of $4.61 billion by 16.4% but improving 11.3% from $3.47 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 second-quarter 2019, Dominion projects operating earnings within 70-80 per share compared with 86 cents in the year-ago period. 

On May 9, Duke Energy Corporation DUK reported first-quarter 2019 earnings of $1.24 per share, which surpassed the Zacks Consensus Estimate of $1.21 by 2.5%. The bottom line improved 40.9% year over year on revenue as well as operating income growth. Total operating revenues came in at $6.16 billion, up 0.5% from $6.14 billion a year ago. The reported figure, however, missed the Zacks Consensus Estimate of $6.25 billion by 1.4%.

Duke Energy reaffirmed its earnings guidance for 2019 at $4.80-$5.20.

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 27.47% weight. Its AUM is $9.4 billion and expense ratio is 0.13%. The fund has gained 9.5% year to date and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Forget Trade Fears, Invest in Defensive Sector ETFs).

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 68 holdings with the above-mentioned companies constituting 23.6%. Its AUM is $3.64 billion and expense ratio is 0.10%. It has gained 9.7% year to date and carries a Zacks ETF Rank #3 with a Medium risk outlook (read: Selloff or Not, Utilities ETFs Should Stand Tall).

 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 24.46%. Its AUM is $800.4 million and expense ratio is 0.43%. It has gained 9.4% year to date. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook.

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