In May, we briefly covered interest rates and their relationship with utility stocks, especially during an economic downturn. Utility stocks are desirable during these downturns because of low interest rates. Lower rates allow utility companies to invest because of the decreased cost of capital. Investing in infrastructure equals growth for these companies which in turn yields profits and dividend payouts to investors. The utility sector is naturally a safe bet because utility companies generate consistent earnings, provide non-discretionary services, and in some regions of the United States, are the only competitor…creating a monopolistic market.
Now we find ourselves in quarter four of 2016 and wondering how soon the Fed will raise rates. We are often told that the economy is getting stronger. Straight from the horse’s mouth, Janet Yellen portrayed a growing economy with some areas of concern in her August 26 speech. “U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports.” Even though business investment “remains soft”, the utilities sector has benefited, especially from the low cost of commodities such as oil and coal. This is one of the reasons utilities have thrived in 2016. In the November 2 press release, it was a whole lot of the same thing. The Fed can say all they want, but they are admitting the economy is frail by holding the interest rates low once again. For those invested in utility stocks already, this is good news.
But eventually, when the economy is strong enough, the Fed will raise rates and the cost of capital will go up. When rates go up, we usually find investors leaving utility stocks behind in search of more desirable investments, such as bonds. It is no secret that interest rate increases put downward pressure on utility stock prices. It is best to find utilities that are least affected by rate hikes and market volatility.
We touched on what to look for in a strong utility stock in our May article. It’s important to find a utility company that is well diversified. A company invested in multiple sources of energy can weather potential storms born from volatile markets or government regulation. The following are a handful of utility stocks that can stand in the face of rising interest rates and turbulent markets whilst generating consistent dividend income to shareholders.
Duke Energy (DUK). Duke Energy is based in Charlotte, NC with assets in Canada and Latin America. They are the largest electric power holding company in the United States. On September 29, 2016, the North Carolina Utilities Commission approved a $6.7 billion deal where Duke acquired Piedmont Natural Gas Company adding 1 million natural gas customers. They have paid a quarterly dividend since 1926 making them a popular dividend stock.
Southern Company (SO). Southern Company has more than 9 million customers across the south. Based in Atlanta, GA, Southern owns electric utilities in four states, natural gas distribution utilities across seven states while also providing fiber optics and wireless communications. In the beginning of July 2016, Southern announced a merger with AGL Resources, making them the second largest utility company in terms of customer base. They have churned out returns close to 17% in 2016…a leader among utility stocks.
Dominion Resources (D). Dominion is also one of the largest producers and transporters of energy in the United States. They have over 14,000 miles of natural gas transmission and 6,500 miles of electric transmission as well as 1 trillion cubic feet of natural gas storage systems. In September 2016, Dominion and Questar Corporation signed off on a $6 billion merger. “Dominion Questar” will serve almost 5 million customers across 7 states. Like Duke Energy and Southern Company, Dominion has produced returns over 12% this year.
Entergy Corporation (ETR). Entergy is based in New Orleans and delivers electricity to 2.8 million customers in 4 states. They own and operate power plants that produce 30,000 megawatts of electricity and 10,000 megawatts of nuclear power. The Board of Directors of ETR has declared a quarterly dividend of $0.87 per common share to be paid December 1, which brandishes a yield just shy of 5%.
CenterPoint Energy Inc. (CNP). CenterPoint is a Fortune 500 electric and natural gas utility that serves 6 states in the US. Based in Houston, TX, CenterPoint sells and delivers natural gas to 3.2 million homes and businesses and owns over 28,000 pole miles of overhead distribution lines as well as 232 substations with a capacity of over 58,000 megavolt amperes. CNP’s earnings per share has shot up from $0.17 in Q2 to $0.41 in Q3.
FRB: Speech–Yellen, The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future–August 26, 2016. 15 Oct. 2016
“Press Release.” FRB: –Federal Reserve Issues FOMC Statement–November 2, 2016. 12 Nov. 2016.
Brown, Ken. “Desperate for Yield? Utility Stocks Are More Dangerous Than They Look.” WSJ. wsj.com, 06 July 2016. Web. 15 Oct. 2016.
Photo: https://en.wikipedia.org/wiki/File:NesjavellirPowerPlant_edit2.jpg, Author: Gretar Ívarsson – Edited by Fir0002, Source: Gretar Ívarsson, geologist at Nesjavellir