Utility services play an important role in the economic progress of a nation. Demand for electricity, gas and water does vary with the ups and downs of the economy, but these companies can never go out of business. In that sense, they are always the reliable bets in uncertain times.
The utility industry has evolved over the decades with increasing industrialization and population growth spurring power demand. But electrical utilities have mostly relied on coal-fired units that have increasingly come under pressure, both from the government and strident pro-environment groups.
The utilities have responded promptly to the criticisms, investing in technologies to meet stringent environmental regulations. As a blessing in disguise, they’ve been compelled to develop new technologies to produce power at cheaper rates and boost their renewable portfolio.
From an investment perspective, utilities have traditionally been the safest bet amid market fluctuation due to the defensive nature of operations. Utilities hardly come out with an amazing earnings surprise beats, but maintain a steady performance even in a choppy market.
Besides offering steady returns, utilities diligently share profits with their shareholders through regular dividend payments. This was true even during the height of the 2008-2009 economic crisis.
The U.S. economy has improved substantially from last year with the Fed gradually scaling back its bond-buying program. The latest release from the Bureau of Labor Statistics showed that 45 states and the District of Columbia saw a decline in the unemployment rate from the prior year, while three states witnessed rising unemployment.
Moreover, per a report from the U.S. Energy Information Administration (EIA), total electricity consumption in the U.S. will increase from 3,826 billion kWh in 2012 to 4,954 billion kWh in 2040. This reflects an average annual growth rate of 0.9%. Supported by a strengthening economy and rising demand, utilities have room for growth going forward.
As discussed above, utilities are investing substantially in infrastructure upgrades and adding more renewables to their fuel mix. These operations are capital intensive for which they often have to take recourse to the markets to raise funds. The Fed in its latest policy meeting maintained its prior stance, saying that rates would stay low for a ’considerable time’ even after the bond-buying program ends. The rock-bottom interest rates and the Fed’s reassurance about keeping them low for at least the near term will bode well for utilities.
The overall picture makes a good case for investing in the sector. Here are three utility stocks that are currently equipped with the right combination of elements to strengthen your portfolio amid market fluctuations.
CMS Energy Corporation (CMS) is an electric utility based in Jackson, MI. This Zacks Rank #2 (Buy) stock has generated a year-to-date return of nearly 13.6% and delivered a positive earnings surprise of 15.4% in the second quarter. It has also surprised expectations in two of the last four quarters with an average beat of 10.15%.
The company has a long-term earnings growth rate of 6.1%. Shares of the company are presently trading at a forward P/E (price-to-earnings) of 16.7x, a discount to the industry average of 18.5x. CMS Energy is expected to register earnings growth of 6.93% in 2014 and its current dividend yield of 3.65% is higher than the industry average.
Edison International (EIX) is an electric utility based in Rosemead, CA. This Zacks Rank #2 (Buy) stock has generated a year-to-date return of nearly 22.6% and has registered a positive earnings surprise of 30.1% in the second quarter. The trailing four quarter earnings beat comes to 20.52%.
The company has a long-term earnings growth rate of 3.4%. Shares of the company are presently trading at a forward P/E of 14.4x, a discount to the industry average. Edison International is expected to register earnings growth of 1.29% in 2014 and its current dividend yield of 2.50% is also higher than the industry average.
The Empire District Electric Company (EDE) is an electric utility based in Joplin, MO. This Zacks Rank #2 (Buy) utility has generated a year-to-date return of nearly 9.9% and has registered a positive earnings surprise of 13.04% in the second quarter. The company has surprised earnings estimates in three out of the last four quarters with an average beat of 16.94%.
The company has a long-term earnings growth rate of 3.0%. Shares of the company are presently traded at a forward P/E of 14.8x, a discount to the industry average. The dividend yield of 4.17% is higher than the industry average.
What Lies Ahead?
We expect the new proposal from the U.S. Environmental Protection Agency to reduce carbon emissions by 30% by 2030 from 2005 levels to further alter the generation mix.
In the second quarter of 2014, earnings for the utility sector were up 12.3% year over year on 3.1% higher revenues. The utilities are expected to record a high single-digit earnings growth rate of 8.5% this season.
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