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3 Utilities to Invest in Even When Rates Are on the Rise
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Although Utility companies are bracketed with the safest investment bets, they still come with a baggage of weaknesses. Regulatory burdens, weather variation and increased debt loads amid rising interest rates are major concerns for such entities. While the Trump administration is expected to lower the industry’s regulatory burden, an even bigger issue is the interest rate backdrop.
The Fed raised interest rates from the near zero levels for seven times till June 2018 which is a drag for rate-sensitive sectors like Utilities. Making things worse, the Fed might hike interest rates twice in 2018, if economic conditions remain conducive.
We expect cost control, new electric rates and customer growth will help the utility sector to come up with earnings growth in the second-quarter reporting cycle. Second-quarter earnings from the utility sector are expected to improve 1.1% on the back of revenue growth of 1.1%.
Let’s analyze factors, which might motivate investors to put money on the utility front despite a rising rate environment.
As per the U.S. Energy Information Administration (EIA), the U.S. residential retail electricity prices are expected at an average 13.5 cents per kilowatt hour (KWh) between June and August 2018, which reflects growth of 2% compared with the previous year. The increased electricity prices are on account of higher generation fuel cost along with higher capital expenditure undertaken by the utility companies for transmission infrastructure.
The unemployment rate in the United States was static at a historical low of 4% as of June 2018. In addition, the United States Building Permits increased 4.4% in March 2018 to 1,379 thousand. The new permits had exceeded the U.S. building permit average of 1355.99 thousand from 1960 to 2018. All these factors indicate an increase in demand for residential utility services.
Per EIA, the U.S. household is expected to spend an average of $426 for the electricity consumption this summer (June-August), an increase of 3% from the average expenditure recorded in the previous year.
We presently recommend investors to put their money on the following utilities with a favorable Zacks Rank, rising earnings estimates and a strong dividend yield, which highlight that these utilities are profitable investment options.
Algonquin Power & Utilities Corp. (AQN - Free Report) currently sports a Zacks Rank #1 (Strong Buy). It delivered an average positive surprise of 28.56% in the last four quarters. The company’s current ratio as of Mar 31, 2018 is 1.25 with a dividend yield of 5.34%. The Zacks Consensus Estimate 2018 earnings per share rise by 8.2%, in the past 60 days.
Portland General Electric Company (POR - Free Report) currently has a Zacks Rank #2 (Buy). It pulled off an average beat of 21.72% in the trailing four quarters. The company’s current ratio stands at 1.35 as of Mar 31, 2018 with a dividend yield of 3.31%. The Zacks Consensus Estimate 2018 earnings per share rise by 2.3%, in the past 60 days.
Southwest Gas Corporation (SWX - Free Report) currently has a Zacks Rank 2. It came up with an average earnings surprise of 2.87% in the preceding four quarters. The company’s current ratio as of Mar 31, 2018 is 1.10 with a dividend yield of 2.68%. The Zacks Consensus Estimate 2019 earnings per share rise by 1.1%, in the past 60 days.
In the last three months, shares of the above mentioned three companies have gained against its sector’s decline.
Bottom Line
At the end of the day, we believe that rise in interest costs will continue to hurt utilities. However, these fundamentally strong utilities are here to stay forever as we are yet to come up with any alternatives to their services.
We think that focus on clean energy is going to be at the top of the utility companies’ agenda in the coming years. We expect utilities to take advantage of the shale boom in the United States, resulting in falling prices of natural gas and improvement in technology making power production from renewable source cost effective. Combined-cycle natural gas power plants not only help lower pollution but also lead to energy efficiency.
Utilities are gradually converting their operations from non-regulated into regulated nature, which will again provide stability to earnings. Moreover, the latest tax reforms have helped all the utilities across the United States and the benefits of the same are being passed on to customers.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
Image: Bigstock
3 Utilities to Invest in Even When Rates Are on the Rise
Although Utility companies are bracketed with the safest investment bets, they still come with a baggage of weaknesses. Regulatory burdens, weather variation and increased debt loads amid rising interest rates are major concerns for such entities. While the Trump administration is expected to lower the industry’s regulatory burden, an even bigger issue is the interest rate backdrop.
The Fed raised interest rates from the near zero levels for seven times till June 2018 which is a drag for rate-sensitive sectors like Utilities. Making things worse, the Fed might hike interest rates twice in 2018, if economic conditions remain conducive.
We expect cost control, new electric rates and customer growth will help the utility sector to come up with earnings growth in the second-quarter reporting cycle. Second-quarter earnings from the utility sector are expected to improve 1.1% on the back of revenue growth of 1.1%.
Let’s analyze factors, which might motivate investors to put money on the utility front despite a rising rate environment.
As per the U.S. Energy Information Administration (EIA), the U.S. residential retail electricity prices are expected at an average 13.5 cents per kilowatt hour (KWh) between June and August 2018, which reflects growth of 2% compared with the previous year. The increased electricity prices are on account of higher generation fuel cost along with higher capital expenditure undertaken by the utility companies for transmission infrastructure.
The unemployment rate in the United States was static at a historical low of 4% as of June 2018. In addition, the United States Building Permits increased 4.4% in March 2018 to 1,379 thousand. The new permits had exceeded the U.S. building permit average of 1355.99 thousand from 1960 to 2018. All these factors indicate an increase in demand for residential utility services.
Per EIA, the U.S. household is expected to spend an average of $426 for the electricity consumption this summer (June-August), an increase of 3% from the average expenditure recorded in the previous year.
We presently recommend investors to put their money on the following utilities with a favorable Zacks Rank, rising earnings estimates and a strong dividend yield, which highlight that these utilities are profitable investment options.
Algonquin Power & Utilities Corp. (AQN - Free Report) currently sports a Zacks Rank #1 (Strong Buy). It delivered an average positive surprise of 28.56% in the last four quarters. The company’s current ratio as of Mar 31, 2018 is 1.25 with a dividend yield of 5.34%. The Zacks Consensus Estimate 2018 earnings per share rise by 8.2%, in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Portland General Electric Company (POR - Free Report) currently has a Zacks Rank #2 (Buy). It pulled off an average beat of 21.72% in the trailing four quarters. The company’s current ratio stands at 1.35 as of Mar 31, 2018 with a dividend yield of 3.31%. The Zacks Consensus Estimate 2018 earnings per share rise by 2.3%, in the past 60 days.
Southwest Gas Corporation (SWX - Free Report) currently has a Zacks Rank 2. It came up with an average earnings surprise of 2.87% in the preceding four quarters. The company’s current ratio as of Mar 31, 2018 is 1.10 with a dividend yield of 2.68%. The Zacks Consensus Estimate 2019 earnings per share rise by 1.1%, in the past 60 days.
In the last three months, shares of the above mentioned three companies have gained against its sector’s decline.
Bottom Line
At the end of the day, we believe that rise in interest costs will continue to hurt utilities. However, these fundamentally strong utilities are here to stay forever as we are yet to come up with any alternatives to their services.
We think that focus on clean energy is going to be at the top of the utility companies’ agenda in the coming years. We expect utilities to take advantage of the shale boom in the United States, resulting in falling prices of natural gas and improvement in technology making power production from renewable source cost effective. Combined-cycle natural gas power plants not only help lower pollution but also lead to energy efficiency.
Utilities are gradually converting their operations from non-regulated into regulated nature, which will again provide stability to earnings. Moreover, the latest tax reforms have helped all the utilities across the United States and the benefits of the same are being passed on to customers.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>