Yahoo Finance Top 5 Utility Stocks to Stay Safe in a Likely Volatile Week
We are in the last month of a disappointing 2022. Record-high inflation and its consequence in the form of an extremely hawkish Fed have pushed investors’ confidence down to its nadir. Concerns regarding slowing economic growth and a possible recession have resulted in severe volatility throughout the year.
Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have tumbled 7.9%, 17.5% and 29.7%, respectively. Fluctuations in the market are also likely this week as the decision regarding the next round of interest rate hike will come on Dec 14, after the conclusion of the Fed FOMC meeting.
Moreover, several major economic data of November such as, consumer price index, retail sales, industrial production and capacity utilization will be released this week. Wall Street is currently in a “Catch 22 Situation.” Strong economic data will ensure solid fundamentals of the U.S. economy. On the other hand, it will give the Fed a reason to continue its aggressive rate hike and monetary tightening to combat inflation.
At this stage, it should be fruitful to invest in defensive stocks like utilities to strengthened your portfolio. We have selected five utility stocks with a favorable Zacks Rank. These companies are - American Electric Power Co. Inc. AEP, The AES Corp. AES, NRG Energy Inc. NRG NiSource Inc. NI and PPL Corp. PPL.
Utilities Immune to the Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.
Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
Utility companies enjoy a reputation for being safe given the regulated nature of their business. This lends their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues.
Additionally, utilities are generally low-beta stocks (beta >0 but <1). At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payment will act as a regular income stream.
Year to date, out of the 11 broad sectors of the S&P 500 Index, 10 are in negative territory, except the energy sector. Of these 10 sectors, utilities suffered the least. The utilities Select Sector SPDR (XLU) dropped marginally by 1.1%.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have seen positive earnings estimate revisions within the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
American Electric boasts a stable earnings base of approximately 5.5 million customers across more than 11 states. AEP’s investment strategy includes incremental investments in renewable generation projects.
American Electric owns the nation's largest electricity transmission system and more than 224,000 miles of distribution lines. AEP plans to invest $40 billion in regulated operations, contracted renewables and wires during the 2022-2027 period, which will assist it in achieving long-term earnings growth of 6-7%.
American Electric has an expected earnings growth rate of 6.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 60 days. AEP has a beta of 0.42 and a current dividend yield of 3.44%.
The AES is a diversified power generation and utility company, providing affordable, sustainable energy through its diverse portfolio of thermal and renewable generation facilities as well as distribution businesses.
AES’ vision is to be the world's leading sustainable power company by leveraging its unique electricity platforms and the knowledge of its people to provide the energy and infrastructure solutions that its customers truly need.
The AES has an expected earnings growth rate of 6.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last seven days. AES has a beta of 0.99 and a current dividend yield of 2.22%.
NiSource expects to invest $40 billion in the long-term utility infrastructure modernization program. The existing capex plans will further enhance the reliability of natural gas and electric operations, and help the company offer efficient services to NI’s expanding customer base.
NiSource continues to increase its clean power assets. Moreover, nearly 75% of NI’s investment is recovered within 18 months through rate hikes, which provides the necessary funds to carry on infrastructure upgrade projects.
NiSource has an expected earnings growth rate of 5.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 60 days. NI has a current dividend yield of 3.43% and a beta of 0.47.
NRG Energy’s operation continues to expand through organic and inorganic initiatives. NRG’s diverse customer base provides stability and customer migration will not affect earnings. NRG Energy aims to achieve net-zero emissions by 2050. NRG rewards shareholders through dividend hikes. NRG is strengthening its balance sheet through proper management of debts.
NRG Energy has an expected earnings growth rate of 46.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 21% over the last 60 days. NRG has a current dividend yield of 4.34% and a beta of 0.85.
PPL’s investment plan will help it expand renewable-generation capacity and achieve carbon neutrality by 2050. PPL is also focusing on infrastructure projects to strengthen transmission and distribution lines. PPL completed the Narragansett Electric acquisition and will gain from customer addition and an expansion of the area of operation. It has enough liquidity to meet its debt obligations.
PPL has an expected earnings growth rate of 33.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.5% over the last 60 days. PPL has a beta of 0.80 and a current dividend yield of 3.11%.
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PPL Corporation (PPL) : Free Stock Analysis Report
NiSource, Inc (NI) : Free Stock Analysis Report
NRG Energy, Inc. (NRG) : Free Stock Analysis Report
American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report
The AES Corporation (AES) : Free Stock Analysis Report
