The lull in the markets with sporadic price swings is over. This year, the U.S. stock market has seen three of the Dow's major daily point drop in its 122-year history, including the 1,175-point record fall on Feb 5. Last Friday’s 572-point collapse has been another nail in the coffin. The U.S. stocks are witnessing massive volatility as investors apprehend a trade war from the bitter exchanges between the Unites States and China over tariffs.
Hedge Against Uncertainty
In an attempt to calm investors' frayed nerves, selecting stocks from the defensive utility space seems prudent. Rising urbanization and an ever-expanding global population show how indispensable electricity and utility services are with basically no viable substitute. This lends revenues and cash flow of such companies a high level of stability and visibility.
Utilities have long been a staple for low-risk income investors. This is specifically true for those that live off dividends during retirement as most utilities have long track records of highly secure and gradually growing dividends, courtesy of their stable cash flows.
In fact, in the recent tumultuous times, the Dow Jones Utility Average index has gained 2.9% in the past month against 5.5% decline of the Dow and 6.5% fall of the S&P 500.
Should a Rate Hike Vex Investors?
In the past decade, record low interest rates have acted as a tailwind, helping electric, water, and gas companies borrow at reduced interest rates.
On Mar 21, the Federal Reserve or Fed has raised its benchmark interest rate by a quarter point to the range of 1.5% to 1.75% in its first policy meeting under the new chief Jerome Powell. This is 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. The central bank also indicated that there will be at least two more hikes in 2018, highlighting its rising confidence that tax cuts and government spending will boost the economy.
Interest rates are now rising and as the pace of increases will potentially accelerate in the coming years, many investors are worried about how utilities will do in the days ahead. Rising rates could drive financing costs and reduce their appeal as dividend investments.
Although it is true that utilities are likely to face the above-mentioned headwinds, it doesn’t mean that there is a dearth of long-term opportunities in this sector. Here, investors need to understand the underlying quality of the utility stocks they own. The best utility companies in a higher interest rate environment are those that are able to gain regulatory approval to bump up the rates they charge from customers.
Per the latest report from the U.S. Energy Information Administration, the annual average U.S. residential electricity price is expected to increase 2.1% in 2018 and 3% in 2019. Electricity prices are also projected to increase in the commercial and industrial sectors. This will surely give a boost to electric utility operators as such a price surge will drive profits for utilities and enhance dividend payouts.
Again, President Trump’s repeal of the regulations (as imposed by President Obama) on economic growth grounds are expected to give a new lease of life to utilities that produce a major part of their electricity from coal. After all, Coal still accounts for nearly 30% of the electricity produced in the United States.
Meanwhile, the utility sector is undergoing a massive transition with more focus on clean energy generation. The relaxed emission regulations under the Trump administration are likely to act as a driving factor for the sector. Stable operations, highly visible revenues and cash flows, combined with the sector’s income/yield attributes are some of its key features.
There has been increasing focus on electricity storage facilities that will provide more support to the grid during peak demand period. Utilities are also regularly investing in infrastructure to better serve customers.
Investing in Utilities: Our Choices
Utility stocks with a low beta make for a judicious investment approach at this time. Beta, also known as the beta coefficient, measures the volatility of a stock in comparison to broader markets. It measures the extent to which a stock’s return may be affected or how much the price can fluctuate owing to market conditions. Stocks having a beta ranging from 0 to 1 mainly show less volatility than the broader markets.
So, risk-averse investors would prefer to neutralize losses with low correlation beta as they are less prone to day-to-day fluctuations. For these investors, we have handpicked five low-beta stocks that also carry a favorable rank, making them potential investment options. These stocks carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy) as we expect them to outperform peers in the near future. You can see the complete list of today’s Zacks #1 Rank stocks here.
For further screening, investors may opt for a comprehensive dividend yield of more than 3%.
Just Energy Group Inc. (JE - Free Report) is engaged in the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts.
Zacks Rank #1
Beta = 0.79
Dividend Yield = 8.68%
Headquartered in Houston, TX, CenterPoint Energy Inc. (CNP - Free Report) is a domestic energy delivery company that includes electric transmission & distribution, natural gas distribution and energy services operations.
Zacks Rank #1
Beta = 0.49
Dividend Yield = 4.13%
Chicago, IL-based Exelon Corporation (EXC - Free Report) is a utility services holding company. Exelon continues with its hedging program to manage market risks. Strong cash flow generation capacity will help it lower debt levels and return more to shareholders.
Zacks Rank #2
Beta = 0.16
Dividend Yield = 3.57%
Based in Sioux Falls, South Dakota, NorthWestern Corporation (NWE - Free Report) provides electricity and natural gas to residential, commercial, and industrial customers.
Zacks Rank #2
Beta = 0.23
Dividend Yield = 4.08%
OGE Energy Corp. (OGE - Free Report) is Oklahoma's largest electric utility. The company’s well-positioned regulated utility and unregulated midstream gas businesses continue to offset the prevailing headwinds.
Zacks Rank #2
Beta = 0.67
Dividend Yield = 4.11%
Zacks Editor-in-Chief Goes ""All In"" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>