Jerome Powell has started walking in the path that was laid down by Janet Yellen, raising the benchmark interest rate by 0.25% to a new range of 1.5% to 1.75% in his first FOMC meeting. This time, the hike did not come as a surprise as strong economic conditions, a low employment rate of 4.1% and all-time highs hit by market indexes called for one.
The Fed rate has now been raised for the sixth time since the first hike was announced in December 2015 when the U.S. economy had pulled itself out of the Great Recession.
Rate hikes are welcomed by some sectors like Banking in anticipation of higher interest income. But the capital intensive Utility sector might cringe at the thought of it for it takes recourse to external sources of financing to meet its capital requirements. In a way, rising interest rates increase this sector’s cost of capital leaving an adverse impact on margins. The rate hikes can also comprise Utilities’ ability to consistently pay out dividend.
More Rate Hikes on the Way
There was a distinct tone of optimism in team Powell with U.S. GDP expanding 2.3% in 2017, surpassing the 1.6% rate achieved in 2016. Not only this, the GDP is expected to improve to 2.7% in 2018 backed by rising oil prices and a strengthening global economy.
The unemployment rate is expected to drop to 3.8% at the end of 2018 from 4.1% thanks to new job additions and further to 3.6% at the end of 2019. Moreover, policy makers expect the inflation rate to be 1.9% at the end of 2018, which should move up 10 basis points to 2% in 2019.
The policy makers sounded quite positive in their outlook for the U.S. economy. Quite naturally, the Fed expects to increase interest rates two more times in 2018.
Fed officials now project a median federal funds rate of 2.9% by the end of 2019 that indicates three rate hikes in 2019 against two predicted in the last Fed meeting in December 2017. They expect the rate to move up to 3.4% in 2020, from the previous expectation of 3.1%.
Despite the present rate hike and expected rate hikes in next two years, Fed rates will still be lower than the historic high of 5.25% touched in June 2006.
Selecting the Right Utilities
Utilities are traditionally averse to interest rate hikes. However, we have selected three utility stocks based on parameters so convincing that investors will think twice before ignoring them even after yesterday’s rate hike.
The qualifying criteria include a current ratio greater than 1, which indicates that a company has enough resources to pay its debts over the next 12 months. The utilities have a debt-to-capital ratio lower than the industry average and their earnings estimate also moved up in last 30 days.
IDACORP, Inc. (IDA - Free Report) is based in in Boise, ID. This regulated utility is engaged in the transmission, distribution and sale of electricity services in southern Idaho and eastern Oregon through its primary subsidiary Idaho Power Company. The long-term earnings growth of this utility is 4.07%.
This Zacks Rank #3 (Hold) stock has a current ratio of 2.21 and a debt-to-capital ratio of 43.63% -- lower than the industry average of 54.6%. IDACORP registered positive earnings surprises in the last four quarters, with an average beat of 9.09%. Its earnings estimate for 2018 increased by 0.5% in the last 30 days.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Great Plains Energy Incorporated through its subsidiaries, generates, transmits, distributes and sells electricity. The long-term earnings growth of this Kansas City, MO based utility is 5.0%.
This Zacks Rank #3 stock has a current ratio of 1.29 and a debt-to-capital ratio of 44.26% -- lower than the industry average of 54.6%. Great Plains Energy registered positive earnings surprises in the last four quarters, with an average beat of 5.13%. Its earnings estimate for 2018 moved up by 1.1% in the last 30 days.
Vistra Energy Corp. (VST - Free Report) through its subsidiaries engages in electricity generation, wholesale energy sales and purchases, commodity risk management and fuel production.
This Irving, TX based company has a current ratio of 1.98 and a debt-to-capital ratio of 41.28% -- lower than the industry average of 54.6%. Zacks Rank #3 Vistra Energy has a registered positive earnings surprise each in the last four quarters, with an average beat of 514.58%. Its earnings estimate for 2018 moved up by 27.1% in the last 30 days.
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