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Utility ETFs in Focus on Mixed Q3 Earnings

Sweta Jaiswal, FRM

The utility sector has come up with mixed results so far this earnings season. Of the 75% S&P industrial companies that have reported, 66.7% beat on the bottom line while 19% surpassed revenue estimates. Earnings have risen 7.9% and revenues have declined 2% year over year, per the Earnings Trends issued on Nov 6.

The S&P 500 Utilities (Sector) index has returned 16.7% year to date. Notably, 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 (read: ETF Strategies to Gain as Wall Street Opens at a Record High). 

Against this backdrop, we 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 Oct 22, NextEra Energy NEE reported third-quarter 2019 adjusted earnings of $2.39 per share, beating the Zacks Consensus Estimate of $2.27 by 5.3%. Moreover, earnings rose 10.1% on a year-over-year basis led by strength across all business segments. In the quarter, operating revenues totaled $5.57 billion, beating the consensus estimate of $5.24 billion by 6.3%. Moreover, revenues improved 26.2% year over year.

The company reiterated its 2019 adjusted earnings guidance at the range of $8.00-$8.50. The company’s earnings are expected to see a compound annual rate of 6-8% every year through 2021, off its base of $7.70 in 2018. NextEra Energy expects 2022 adjusted earnings per share in the range of $10-$10.75, indicating 6-8% growth from 2021 EPS.

On Nov 1, Dominion Energy D reported third-quarter 2019 operating earnings of $1.18 per share, beating the Zacks Consensus Estimate of $1.16 by 1.7%. Also, operating earnings were near the high end of the company’s guided range of $1.00-$1.20 per share. Impressive performance by business units and favorable weather conditions helped the company improve earnings from the year-ago $1.15. Total revenues came in at $4.27 billion, lagging the consensus estimate of $4.41 billion by 3.3% but improving 23.7% from $3.45 billion reported in the year-ago quarter.

For 2019, Dominion narrowed its earnings guidance to the range of $4.15-$4.30 per share from the earlier $4.05-$4.40. The company had recorded earnings of $4.05 per share in 2018.  For fourth-quarter 2019, Dominion expects operating earnings within $1.10-$1.25 per share. The company had reported earnings of 89 cents per share in the year-ago period.

On Nov 8, Duke Energy Corporation DUK reported third-quarter 2019 earnings of $1.79 per share, which surpassed the Zacks Consensus Estimate of $1.69 by 5.9%. The bottom line improved 8.4% year over year on revenue as well as operating income growth. Total operating revenues came in at $6.94 billion, up 4.7% from $6.63 billion a year ago. The reported figure also exceeded the Zacks Consensus Estimate of $6.82 billion by 1.8%.

Duke Energy has narrowed its 2019 adjusted EPS guidance. It expects adjusted earnings per share of $4.95-$5.15. The company reaffirms long-term earnings growth target of 4-6%.

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 28.51% weight. Its AUM is $10.93 billion and expense ratio is 0.13%. The fund has gained 18.7% year to date and carries a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Phase 1 Trade Deal or Not: ETFs to Ride the Trend).

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 24.1%. Its AUM is $4.22 billion and expense ratio is 0.10%. It has gained 18.4% year to date and carries a Zacks ETF Rank #2 with a Medium risk outlook (read: ETF Strategies to Follow Amid Recession Scares ).

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 25.32%. Its AUM is $946.8 million and expense ratio is 0.43%. It has gained 17.9% year to date. The fund carries a Zacks ETF Rank #3 (Hold) 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
 
Vanguard Utilities ETF (VPU): ETF Research Reports
 
iShares U.S. Utilities ETF (IDU): ETF Research Reports
 
Utilities Select Sector SPDR Fund (XLU): ETF Research Reports
 
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