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5 Utility Stocks to Buy to Stay Safe Amid Severe Volatility

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Wall Street has been reeling under severe volatility since the beginning of this year. Market participants’ nightmare continues as two major stock indexes are already under correction territory and the third one is very near to it. The anticipation of a tougher-than-expected stand by the Fed in March to combat soaring inflation and geopolitical conflicts between Russia and Ukraine has dented investors’ confidence significantly.

At this juncture, it will be prudent to stay invested in defensive stocks from the utilities space as these are less volatile in a market downturn. Five such stocks with a favorable Zacks Rank are PNM Resources Inc. (PNM - Free Report) , Entergy Corp. (ETR - Free Report) , Xcel Energy Inc. (XEL - Free Report) , WEC Energy Group Inc. (WEC - Free Report) and Atmos Energy Corp. (ATO - Free Report) .

Turmoil on Wall Street

As of Feb 23, the market’s benchmarks the S&P 500 and the tech-heavy Nasdaq Composite were in correction territory, meaning that these two indexes have fallen more than 10% from their recent all-time high. The tech-laden index is currently just 1.5% above the bear territory, reflecting a 20% drop in value from its recent all-time high. The blue-chip Dow is just 22 points above its correction territory.

Utilities Immune to the Vagaries of Economic Cycle    

The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.

Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows.  Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.

Utility companies enjoy a reputation for being safe given the regulated nature of their business, which lend their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues.

Moreover, utility stocks are generally low-beta stocks (beta >0 but <1). At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option. If the market’s northbound journey reestablishes, the favorable Zacks Rank of these stocks will capture the upside potential. However, if markets take a downturn, low-beta stocks will minimize portfolio losses and dividend payment will act as a regular income stream.

Our Top Picks

We have narrowed our search to five utility stocks with growth potential for 2022. These stocks have seen good earnings estimate revisions in the past 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

PNM Resources continues to invest in its utility infrastructure and develop cost-effective power generation units to provide reliable and affordable power. PNM is scheduled to merge with AVANGRID by the end of the ongoing year, which will likely boost its performance.

PNM Resources aims to exit its coal-fired generation units and have an emission-free generating portfolio by 2040. Also, it plans to replace coal with cleaner energy sources in its production portfolio. PNM has sufficient liquidity to meet its near-term obligations and fund capital expenditure projects.

PNM Resources has an expected earnings growth rate of 6.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the past 30 days. PNM has a current dividend yield of 3.11% and a beta of 0.49.

Entergy has an investment plan in place to maintain utility support, and upgrade distribution and transmission. Such investment plans are expected to boost customer and industrial load growth that should drive the earnings of Entergy.

Over the next three years, ETR plans to invest $12 billion. Entergy is also making steady investments to boost its renewables portfolio. In its EDGE plan, ETR expects to add 1,000MW of renewable energy over the next five years.

Entergy has an expected earnings growth rate of 5.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days. ETR has a current dividend yield of 3.87% and a beta of 0.62.

Xcel Energy is well poised to benefit from its long-term investment and renewable power generation. XEL’s expanding electric and natural gas customer base along with the enforcement of new rates act as its key tailwinds.

Xcel Energy has plans to become carbon neutral by 2050. XEL has been paying dividends on a regular basis, thus enhancing its shareholder value. Also, it has sufficient liquidity to meet its near-term obligations.

Xcel Energy has an expected earnings growth rate of 7.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 30 days. XEL has a current dividend yield of 2.78% and a beta of 0.34.

WEC Energy continues to add electric and natural gas customers, which are expected to boost demand for its services. WEC targets a 17.7-billion investment in the 2022-2026 period to strengthen its infrastructure and add renewable assets to its portfolio. The ongoing investment is increasing the efficiency of operations and allowing the company to provide reliable services.

WEC Energy is also focused on becoming net carbon neutral by 2050 from the 2005 levels and spending on cost-effective low-emission generation projects. Also, WEC continues to boost its shareholder value through dividend hikes.

WEC Energy has an expected earnings growth rate of 4.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 30 days. WEC has a current dividend yield of 3.24% and a beta of 0.25.

Atmos Energy continues to benefit from rising demand from its expanding customer base.  ATO is planning to invest in the range of $13-$16 billion in the fiscal 2022-2026 time period to increase the reliability of its pipelines and serve customers efficiently.

Returns within a year of capital investment continue to boost Atmos Energy’s performance and allow it to pay regular dividends. ATO has enough liquidity to meet near-term debt obligations.

Atmos Energy has an expected earnings growth rate of 7.8% for the current year (ended September 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 30 days. ATO has a current dividend yield of 2.56%. and a beta of 0.47.