Utilities provide basic services and are not affected by the vagaries of the economy. These are preferred by investors due to stability of operations and their capability to reward shareholders with regular dividend payments.
Utility operation is capital intensive as consistent investment is required to upgrade, maintain and replace older wires and electric poles, as well as power stations. Hence, apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgradation activities.
The Fed rate has now been raised for the ninth time since the first hike was announced in December 2015, when the U.S. economy pulled itself out of the Great Recession. In a way, rising interest rates increase this sector’s cost of capital, in turn impacting margins. Plus, higher cost of funding may force utilities to delay their capital expenditure plans, impacting cash flow and earnings growth.
However, cost control, new electric rates, customer growth and stable demand continue to help the utility sector maintain operational stability.
Amid the above backdrop, let’s focus on two Zacks Utility - Electric Power industry stocks, namely FirstEnergy Corporation (FE - Free Report) and Xcel Energy Inc. (XEL - Free Report) , to ascertain which is a better buying option going into 2019. Steady performance, along with stable earnings and cash flow enable these companies to reward investors through regular dividends.
FirstEnergy, currently carrying a Zacks Rank #2 (Buy), has a market capitalization of $19.06 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..
Xcel Energy, currently carrying a Zacks Rank #3 (Hold), has a market capitalization of $25.31 billion.
In the past 12 months, shares of FirstEnergy and Xcel Energy have gained 21.7% and 2.4%, respectively. The industry recorded a decline of 2.2% over the same period.
Long-Term Earnings Growth and Surprise Trend
Earnings of FirstEnergy and Xcel Energy are expected to improve 6% and 5.86%, respectively, in the long term (three to five years).
FirstEnergy and Xcel Energy both outpaced the Zacks Consensus Estimate, and recorded average positive earnings surprise of 3.67% and 4.51%, respectively in the last four quarters.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for FirstEnergy and Xcel Energy was 24.42% and 10.75%, respectively. Both the companies outperformed the industry’s ROE of 9.44%.
The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. FirstEnergy has a debt-to-capital ratio of 70.73% compared with the industry’s 49.52%. Meanwhile, Xcel Energy has a debt-to-capital ratio of 56.04%.
Utility companies generally distribute dividends. Currently, the dividend yield for FirstEnergy stands at 3.86%, higher than 3.09% for Xcel Energy. FirstEnergy’s dividend yield is also better than the industry’s 3.19%.
Both the companies are providing quality services to customers and presently have plans to invest billions of dollars in capital projects over the next few years. These additions and the expansion of infrastructure will enable these two utilities to serve their expanding customer base more efficiently.
Markedly, it is quite evident from the above comparisons that FirstEnergy is a better utility stock to accumulate.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>