Utilities provide customers with basic amenities like electricity, gas and water. Hence, the demand for these services hardly fluctuates, regardless of market volatilities. So what if there is a Brexit referendum. Will a U.S. consumer curtail his or her electricity or water consumption because of a widely apprehended downturn? As the answer is an obvious No, so are investors assured of a steady return even in a turbulent global market condition.
Interest Rate Benefit to Continue
These capital intensive utilities routinely take recourse to the capital markets to arrange for funds needed to upgrade and expand their infrastructure. The prevalent low interest rate scenario helps them to get the much-needed funds on favorable conditions.
The referendum of the British people to leave the European Union has added more volatility to an already choppy global economy. Given the market turmoil, the Fed will be reluctant to alter rates in the second half of 2016, much to the favor of utilities.
The utilities will continue to enjoy the windfall from continued lower rates due to the economic uncertainty caused by Brexit.
Domestic Focus Reduces Risk
While multi-national U.S. companies had to pay the price of slower–than-expected growth in the global economy, the domestic focused utilities consistently returned value to their investors this year. The Dow Jones Utility Average (DJU) is up 20.5% year to date (as of Jun 27, 2016) compared with the S&P 500’s return of down 2.2% over the same time frame.
The Brexit decision had a significant role to play here, wiping out the gains registered by the S&P 500 so far this year. The key index lost nearly 5.6% over the last two trading sessions trigged by a Brexit induced sell-off. On the other hand, DJU gained nearly 2.1% post-Brexit.
Apart from the above factors, let's sum up other crucial points that make the utility sector an attractive choice for investors in times of heightened volatility.
Steady Earnings Stream: The majority of utilities are governed by rates fixed by regulatory bodies of the states in which they operate. This ensures a steady earnings stream.
No Alternatives: The services provided by utilities do not have alternatives as we are yet to find any replacement for electricity or water. So, the utilities are assured of demand for their services irrespective of market turmoil.
Regular Dividend: Most of the utilities are regular dividend payers. Even if the stock price remains range bound and does not shoot up drastically, remaining invested in utilities provides investors with current income through regular dividend payments. Most of the utilities continued to pay dividends even during the height of the 2008 financial crisis.
4 Stocks to Buy Now
We have picked four utilities boasting a Zacks Rank # 2 (Buy) and a VGM score of either ‘A’ or ‘B’. In addition, these stocks are regular dividend payers and their shares have gained over 4% in the last four weeks. These stocks should be prudent additions to your portfolio now given the jitters in the economy following U.K.’s “leave” decision.
Avista Corporation AVA provides electric and natural gas services to its customers. The company serves in excess of 0.7 million customers in its service territories.
Avista Corporation has a Zacks Rank #2 (Buy) and a VGM Score of A. The current dividend yield of this company is 3.17 and its stock price appreciated by 6.83% over the last 4 weeks. The current long-term earnings growth is pegged at 5%.
SABESP SBS provides water and wastewater services to its customers. The company through 8.4 million water connections serves nearly 25.5 million and through 6.9 million sewage connections serves 22.8 million people.
SABESP has a Zacks Rank #2 (Buy) and a VGM Score of A. The current dividend yield of this company is 0.54 and its stock price appreciated by 12.5% over the last 4 weeks. The current long-term earnings growth is pegged at 29.67%.
MDU Resources Group Inc.’s MDU utility companies provide electric and natural gas services to more than 1 million customers in eight states.
MDU Resources Group has a Zacks Rank #2 (Buy) and a VGM Score of A. The current dividend yield of this company is 3.23 and its stock price appreciated by 7.15% over the last 4 weeks. The company reported an average positive earnings surprise of 2.35% in the last four quarters. The current long-term earnings growth is pegged at 7.00%.
CenterPoint Energy, Inc. CNP is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations.
CenterPoint Energy has a Zacks Rank #2 (Buy) and a VGM Score of B. The current dividend yield of this company is 4.45 and its stock price appreciated by 4.43% over the last 4 weeks. The company reported an average positive earnings surprise of 6.95% in the last four quarters. The current long-term earnings growth is pegged at 5.5%.
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