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Wall Street witnessed an impressive bull run in 2023, but the utility sector suffered a blow. Of the 11 broad sectors of the market’s benchmark — the S&P 500 Index — the Utility sector declined more than 11%. Investors’ preference shifted to growth stocks from defensive sectors like utility as the Fed significantly reduced the magnitude of interest rate hikes.
However, the utility sector is likely to regain momentum in 2024. In its December FOMC meeting, the Fed clearly gave signal to end the current rate hike regime. There is a high probability of interest rate declines in 2024, which will benefit the utilities.
Utility operations are capital-intensive, as consistent investments are required to upgrade, maintain and replace older wires, electric poles and power stations. Hence, apart from internal fund sources, utilities depend on the credit market for funds to carry on upgrades.
Utilities Immune to 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. Such companies provide basic services like electricity, gas, water and telecommunications, which will always be in 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. This lends 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.
Additionally, utilities are generally low-beta stocks (beta >0 but <1). These companies generally provide a good dividend. Investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option if volatility persists in early 2024.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have good potential for 2024 and have seen positive earnings estimate revisions within the last 60 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 in the past one year.
Image Source: Zacks Investment Research
American Water Works Co. Inc. (AWK - Free Report) is gaining from the implementation of new water systems and contributions from military contracts. Investments to upgrade its infrastructure will allow AWK to provide quality services to its expanding customer base.
AWK continues to expand operations through organic and inorganic initiatives. Cost management is boosting margins. Our model projects an increase in revenues for the 2023-2025 period.
American Water Works Co. has an expected revenue and earnings growth rate of 2% and 6.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. AWK has a beta of 0.65 and a current dividend yield of 2.14%.
Sempra Energy (SRE - Free Report) is an energy services holding company involved in the sale, distribution, storage and transportation of electricity and natural gas. SRE also invests in, develops and operates energy infrastructure.
Outside North America, SRE boasts a strong and growing presence in Mexico, through a diverse portfolio of energy infrastructure projects and assets serving its growing energy need.
Sempra Energy has an expected revenue and earnings growth rate of 1.8% and 5.8%, respectively, for the current year. The Zacks Consensus Estimate for next-year earnings has improved 0.6% over the last 30 days. SRE has a beta of 0.73 and a current dividend yield of 3.16%.
Atmos Energy Corp. (ATO - Free Report) continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help to increase the safety and reliability of its natural gas pipelines. ATO gains from industrial customer additions and constructive rate outcomes.
Atmos Energy has an expected revenue and earnings growth rate of 23.4% and 7.5%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days. ATO has a beta of 0.67 and a current dividend yield of 2.78%.
NiSource Inc. (NI - Free Report) continues to add clean assets to the portfolio and retire coal-based units. NI expects to invest $15 billion in modernizing infrastructure, which will further enhance the reliability of its operations.
Within 18 months, nearly 75% of NI’s investment was recovered through rate hikes, providing the company with funds to carry on infrastructure upgrades. NiSource has enough liquidity to meet debt obligations. Our model predicts NI’s total operating revenues to increase in 2024 and 2025.
NiSource has an expected revenue and earnings growth rate of 5.8% and 7.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 60 days. NI has a beta of 0.51 and a current dividend yield of 3.74%.
Consolidated Edison Inc. (ED - Free Report) continues to follow a systematic capital investment plan for infrastructure development and projects to make an investment of $14.6 billion for the 2023-2025 period. In the next 10 years, ED plans to invest $72 billion. It also plans to use the Clean Energy Businesses sale proceeds to repay $1,250 million of parent company debt in 2023.
Consolidated Edison has an expected revenue and earnings growth rate of 2.8% and 5.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days. ED has a beta of 0.36 and a current dividend yield of 3.54%.
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Utility Sector Set to Revive in 2024: 5 Top Picks
Wall Street witnessed an impressive bull run in 2023, but the utility sector suffered a blow. Of the 11 broad sectors of the market’s benchmark — the S&P 500 Index — the Utility sector declined more than 11%. Investors’ preference shifted to growth stocks from defensive sectors like utility as the Fed significantly reduced the magnitude of interest rate hikes.
However, the utility sector is likely to regain momentum in 2024. In its December FOMC meeting, the Fed clearly gave signal to end the current rate hike regime. There is a high probability of interest rate declines in 2024, which will benefit the utilities.
Utility operations are capital-intensive, as consistent investments are required to upgrade, maintain and replace older wires, electric poles and power stations. Hence, apart from internal fund sources, utilities depend on the credit market for funds to carry on upgrades.
Utilities Immune to 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. Such companies provide basic services like electricity, gas, water and telecommunications, which will always be in 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. This lends 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.
Additionally, utilities are generally low-beta stocks (beta >0 but <1). These companies generally provide a good dividend. Investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option if volatility persists in early 2024.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have good potential for 2024 and have seen positive earnings estimate revisions within the last 60 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 in the past one year.
Image Source: Zacks Investment Research
American Water Works Co. Inc. (AWK - Free Report) is gaining from the implementation of new water systems and contributions from military contracts. Investments to upgrade its infrastructure will allow AWK to provide quality services to its expanding customer base.
AWK continues to expand operations through organic and inorganic initiatives. Cost management is boosting margins. Our model projects an increase in revenues for the 2023-2025 period.
American Water Works Co. has an expected revenue and earnings growth rate of 2% and 6.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 30 days. AWK has a beta of 0.65 and a current dividend yield of 2.14%.
Sempra Energy (SRE - Free Report) is an energy services holding company involved in the sale, distribution, storage and transportation of electricity and natural gas. SRE also invests in, develops and operates energy infrastructure.
Outside North America, SRE boasts a strong and growing presence in Mexico, through a diverse portfolio of energy infrastructure projects and assets serving its growing energy need.
Sempra Energy has an expected revenue and earnings growth rate of 1.8% and 5.8%, respectively, for the current year. The Zacks Consensus Estimate for next-year earnings has improved 0.6% over the last 30 days. SRE has a beta of 0.73 and a current dividend yield of 3.16%.
Atmos Energy Corp. (ATO - Free Report) continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help to increase the safety and reliability of its natural gas pipelines. ATO gains from industrial customer additions and constructive rate outcomes.
Atmos Energy has an expected revenue and earnings growth rate of 23.4% and 7.5%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days. ATO has a beta of 0.67 and a current dividend yield of 2.78%.
NiSource Inc. (NI - Free Report) continues to add clean assets to the portfolio and retire coal-based units. NI expects to invest $15 billion in modernizing infrastructure, which will further enhance the reliability of its operations.
Within 18 months, nearly 75% of NI’s investment was recovered through rate hikes, providing the company with funds to carry on infrastructure upgrades. NiSource has enough liquidity to meet debt obligations. Our model predicts NI’s total operating revenues to increase in 2024 and 2025.
NiSource has an expected revenue and earnings growth rate of 5.8% and 7.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 60 days. NI has a beta of 0.51 and a current dividend yield of 3.74%.
Consolidated Edison Inc. (ED - Free Report) continues to follow a systematic capital investment plan for infrastructure development and projects to make an investment of $14.6 billion for the 2023-2025 period. In the next 10 years, ED plans to invest $72 billion. It also plans to use the Clean Energy Businesses sale proceeds to repay $1,250 million of parent company debt in 2023.
Consolidated Edison has an expected revenue and earnings growth rate of 2.8% and 5.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days. ED has a beta of 0.36 and a current dividend yield of 3.54%.