The markets have braved several uncertainties in the first half of 2016 to finally emerge in the green. Shrugging off global growth concerns, particularly the China slowdown, turbulent oil prices, depressing U.S. jobs reports in May, the Federal Reserve’s indecisive rate hike/ no-rate-hike policies and finally to top it all a surprise Brexit referendum, the S&P 500 Index has gained 2.69% through the first six months of the year.
The gains were led by the natural safe-haven Telecommunications and Utility sectors followed by a rebounding Energy sector. This came on the back of easing monetary policies as the Fed, which had started a monetary tightening program last December, retreated from its rate hike stance for the time being. The markets have also bounced back after the post-Brexit chaos, further consolidating their gains. The global stock market had wiped out $2 trillions of investor wealth in a single day, overshadowing the prior sell-off record of $1.9 billion in Sep 2008.
Though the markets are now a lot calmer, political and economic risks loom large due to uncertainties related to U.K.’s exit from the 28-nation bloc. Given the circumstances, investors would do well to add utility stocks to buttress their portfolio.
S&P 500 sector
Total return –1H16
Total return – 1H15
Prevalent Low Interest Rate a Boon
Fed interest rates greatly affect the utility sector because of its capital intensive nature. These companies have to incur significant debts to carry out infrastructure upgrade programs. The Fed's assurance that future interest-rate increases will be gradual has helped the sector to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments.
Another factor that must surely have played on risk-averse investors’ mind was the Brexit effect. Owing to the existing global turmoil arising from the “leave” vote, the Fed may be hesitant to alter rates in the second half of 2016, much to the favor of utilities.
Thus, utilities may continue to enjoy the windfall of lower rates due to the economic uncertainty caused by Brexit.
Zacks Industry Rank and Q2 Earnings Vision
As per the Zacks Industry Rank, the utility sector as a whole is in a neutral zone as two major industries in this space (Electric Power and Gas Distribution) currently hold a “ Neutral” rank while Water Supply sports a “Positive” rank.
Notably, from the recent Zacks Earnings Trend report, the overall utility sector’s earnings are expected to grow a solid 20.7% in Q2, a sharp rise from the 6.9% earnings decline registered in the preceding quarter. The sector is expected to register top-line growth of 2.4% (10.4% decrease in Q1) while margins are projected to move south by 1.7% (0.9% growth in Q1).
Utility Stocks that Led the Way
On the back of solid share price appreciation of the utilities as well as impressive Q2 earnings prospects, we recommend investors to invest in this defensive sector for stable returns.
Below, we have picked five utility stocks that saw their prices head north against all global odds in the first half of the year. These five stocks also boast a Zacks Rank #1 (Strong Buy) or #2 (Buy), along with a good dividend yield.
Electric utility company Avista Corporation’s (AVA - Free Report) shares climbed 29% in the first six months of 2016. This stock has a low beta of 0.43 and holds a Zacks Rank #2. The stock has a current dividend yield of 3.08%.
Avista is a diversified energy company with utility and other subsidiaries operating across North America. The current long-term earnings growth is pegged at 5%.
MDU Resources Group Inc.’s (MDU - Free Report) utility companies provide electric and natural gas services to more than 1 million customers in eight states.
MDU Resources Group has a Zacks Rank #2 and its shares have jumped 33.4% in the first half. The current dividend yield of this company is 3.09 and the long-term earnings growth is pegged at 7.00%. It also has also a low beta value of 0.85.
CenterPoint Energy, Inc. (CNP - Free Report) is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations.
Shares of CenterPoint Energy have rallied 34.2% in the first half and currently has a Zacks Rank #2. The company has an attractive dividend yield of 4.28 and the current long-term earnings growth is pegged at 5.5%. Additionally, it has a low beta value of 0.41.
Spark Energy, Inc. (SPKE - Free Report) provides residential and commercial customers across the United States with an alternative choice for their natural gas and electricity. The stock has gone up by about 63.8% over the first half of 2016 and has a solid dividend yield of 4.37%. The company currently sports a Zacks Rank #1.
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS - Free Report) is a provider of water and wastewater services to residential, commercial, industrial and governmental customers in the City of Sao Paulo. The company through 8.4 million water connections serves nearly 25.5 million and through 6.9 million sewage connections serves 22.8 million people.
The stock rallied 94.8% in the first half and has a Zacks Rank #2. The long-term earnings growth is pegged at 29.67%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>