Global financial market conditions continue to remain weak thanks to the ongoing crude price volatility, lower-than-expected recovery in some regions and Britain’s vote to exit the EU. The upcoming U.S. Presidential election is further contributing to the uncertainty. Also, a stronger dollar continues to hurt U.S. manufacturers.
In such a situation, investing in the fundamentally strong and mature utility sector is a viable option for investors to overcome market volatility. Demand for utility services like electricity, gas and water is not susceptible to market fluctuations and therefore the fortunes of these companies do not swing as much as others in response to cyclical changes in the economy. After all, these companies provide basic services that can never go out of business and this is their fundamental strength.
Stocks of utility companies enjoy a reputation for safety, owing to the regulated nature of their business. This gives their revenues a high level of certainty. In addition, the ability to boost shareholders’ value through consistent dividends and share buybacks makes them all the more attractive.
To provide an uninterrupted supply of basic amenities, utilities need to upgrade and strengthen their infrastructure and modernize the generation fleet. These capital intensive utilities therefore routinely take recourse to the capital markets to meet the above requirements. Though the regulated utilities are cash generators, the funds generated from internal sources are not sufficient to carry out long-term projects. Given their business model, a low interest rate scenario helps them to get the much-needed funds on favorable conditions.
However, the increase in interest rate by the Federal Reserve in Dec 2015 raised the cost of capital for the utilities to some extent. Another round of rate hikes before the end of this year might further increase the cost of capital of the defensive utilities and can eat into profits, which are otherwise distributed as dividend.
How to Select The Right Utilities
Recognizing a stock with good prospects is no mean feat. But thanks to our new Style Score System, we have been able to identify a few stocks with incredible near-term growth potential.
Our research shows that stocks with a VGM score of ‘A’ or ‘B’, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best investment opportunities for investors.
In addition, the utilities mentioned here have returned in excess of 1.5% in the last month compared with 0.1% negative return of the S&P 500 members during the same time period.
Empresa Distribuidora y Comercializadora Norte S.A. (EDN - Free Report) engages in the distribution and sale of electricity in Argentina. As of Dec 31, 2015, it served nearly 2,835,229 residential, small and medium commercial, industrial, wheeling system, and public lighting customers.
This Zacks Rank #2 stock has a VGM Score of ‘B’ and returned 10.92% to investors in September.
Veolia Environnement S.A. (VEOEY - Free Report) provides a range of environmental services through its Water, Waste Solutions, and Energy Services businesses.
This Zacks Rank #2 stock has a VGM Score of ‘B’ and returned 6.63% to investors in September.
Nippon Telegraph and Telephone Corporation along with its subsidiaries provides fixed and mobile voice-related services, IP/packet communications services, and other telecommunications-related services in Japan and other countries.
The stock has a VGM score of ‘A’ and returned 2.99% to the investors in September. It also sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Telekom Austria AG (TKAGY - Free Report) along with its subsidiaries provides fixed line and mobile communication services to individuals, commercial and non-commercial organizations, and other national and foreign carriers.
This Zacks Rank #2 stock has a VGM Score of ‘A’ and returned 1.76% to investors in September.
DTE Energy Company (DTE - Free Report) is a holding company with its subsidiaries engaged in regulated and unregulated energy businesses.
This Zacks Rank #2 stock has a VGM Score of ‘B’ and returned 1.58% to investors in September.
Confidential: Zacks' Best Investment Ideas
Would you like to see a hand-picked "all-star" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>