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5 Utility Stocks to Buy for a Stable Portfolio Amid Volatility
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U.S. stock markets suffered a bloody blow in early August after a 19-month bull run. The Wall Street rout started primarily due to two factors. First, a few key economic data for July, especially labor market data, came in significantly lower than expected. This raised concerns about a near-term recession in the U.S. economy.
The second reason was the unwinding of “Yen carry-trade” after the Bank of Japan unexpectedly hiked the benchmark interest rate last week. Large institutional investors, especially hedge funds used to borrow massively in low-interest rate currencies like Japanese Yen to purchase high-yielding assets like equities. A higher interest rate in Japan suddenly raised the cost of borrowing for these institutions prompting them to unwind Yen-funded purchases.
At this juncture, investment in defensive stocks like utilities with a favorable Zacks Rank should safeguard your portfolio.
Utilities Immune to Vagaries of Economic Cycle
Utilities are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. Such companies provide basic services like electricity, gas, water and telecommunications, which will always be in 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.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Other Positives
Utility operations are capital-intensive, as consistent investments are required to upgrade, maintain and replace older wires, electric poles and power stations. Hence, apart from internal fund sources, utilities depend on the credit market for funds to carry on upgrades. Therefore, a reduction in the benchmark lending rate will provide a boost to this sector.
At the start of July, the CME FedWatch showed a 68% probability of a 25 basis-point rate cut by the Fed in September. On Jul 31, after the Fed Chairman signaled a possible rate cut in September, that probability jumped to 100%. Following the release of weak labor market data for July, the CME FedWatch currently shows a 71.5% chance of a 50 basis-point rate cut in September.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have good potential for 2024 and 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
Atmos Energy Corp. (ATO - Free Report) continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help increase the safety and reliability of its natural gas pipelines.
ATO gains from industrial customer additions and constructive rate outcomes. Returns within a year of capital investment will further boost the company’s performance. ATO has enough liquidity to meet debt obligations.
Atmos Energy has an expected revenue and earnings growth rate of 6.9% and 11%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 30 days. ATO has a current dividend yield of 2.85% and a beta of 0.67.
Exelon Corp.’s (EXC - Free Report) strategic capital investment will strengthen its transmission and distribution infrastructure and assist it providing reliable services to its customers. EXC's initiatives in grid modernization are going to improve the resilience of its electricity distribution system. EXC’s revenue decoupling mitigates the impact of load fluctuation. EXC’s stable cash flow, allows it to pay regular dividend.
Exelon has an expected revenue and earnings growth rate of 1.3% and 2.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 30 days. EXC has a current dividend yield of 4.05% and a beta of 0.52.
Ameren Corp. (AEE - Free Report) has been benefiting from its systematic investments in infrastructural upgrades and renewable expansion. Profitable returns earned from such investments enable AEE to reward its shareholders with solid dividend payouts. AEE aims to spend up to $20.8 billion in the 2024-2028 period, with a dividend payout target of 55-65%.
Ameren has an expected revenue and earnings growth rate of 2.4% and 5.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days. AEE has a current dividend yield of 3.34% and a beta of 0.44.
American Electric Power Co. Inc. (AEP - Free Report) owns the United States' largest electricity transmission system, with 40,000 circuit miles of transmission lines. To further strengthen its grid, AEP plans to invest $43 billion during the 2024-2028 period. Such investments should enable AEP to achieve a long-term earnings growth rate of 6-7%.
American Electric Power has an expected revenue and earnings growth rate of 6.1% and 6.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. AEP has a current dividend yield of 3.59% and a beta of 0.53.
California Water Service Group’s (CWT - Free Report) strategic investments in infrastructure should allow it to provide reliable water and wastewater services to its customers. CWT gains from the expansion of its operations through acquisitions and organic activities. Management also increases shareholder value via dividend hikes. CWT is also enjoying benefits from rising demand from its expanding customer base.
California Water Service has an expected revenue and earnings growth rate of 19.7% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the last seven days. CWT has a current dividend yield of 2.11% and a beta of 0.47.
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5 Utility Stocks to Buy for a Stable Portfolio Amid Volatility
U.S. stock markets suffered a bloody blow in early August after a 19-month bull run. The Wall Street rout started primarily due to two factors. First, a few key economic data for July, especially labor market data, came in significantly lower than expected. This raised concerns about a near-term recession in the U.S. economy.
The second reason was the unwinding of “Yen carry-trade” after the Bank of Japan unexpectedly hiked the benchmark interest rate last week. Large institutional investors, especially hedge funds used to borrow massively in low-interest rate currencies like Japanese Yen to purchase high-yielding assets like equities. A higher interest rate in Japan suddenly raised the cost of borrowing for these institutions prompting them to unwind Yen-funded purchases.
At this juncture, investment in defensive stocks like utilities with a favorable Zacks Rank should safeguard your portfolio.
Utilities Immune to Vagaries of Economic Cycle
Utilities are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. Such companies provide basic services like electricity, gas, water and telecommunications, which will always be in 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.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Other Positives
Utility operations are capital-intensive, as consistent investments are required to upgrade, maintain and replace older wires, electric poles and power stations. Hence, apart from internal fund sources, utilities depend on the credit market for funds to carry on upgrades. Therefore, a reduction in the benchmark lending rate will provide a boost to this sector.
At the start of July, the CME FedWatch showed a 68% probability of a 25 basis-point rate cut by the Fed in September. On Jul 31, after the Fed Chairman signaled a possible rate cut in September, that probability jumped to 100%. Following the release of weak labor market data for July, the CME FedWatch currently shows a 71.5% chance of a 50 basis-point rate cut in September.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have good potential for 2024 and 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
Atmos Energy Corp. (ATO - Free Report) continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help increase the safety and reliability of its natural gas pipelines.
ATO gains from industrial customer additions and constructive rate outcomes. Returns within a year of capital investment will further boost the company’s performance. ATO has enough liquidity to meet debt obligations.
Atmos Energy has an expected revenue and earnings growth rate of 6.9% and 11%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 30 days. ATO has a current dividend yield of 2.85% and a beta of 0.67.
Exelon Corp.’s (EXC - Free Report) strategic capital investment will strengthen its transmission and distribution infrastructure and assist it providing reliable services to its customers. EXC's initiatives in grid modernization are going to improve the resilience of its electricity distribution system. EXC’s revenue decoupling mitigates the impact of load fluctuation. EXC’s stable cash flow, allows it to pay regular dividend.
Exelon has an expected revenue and earnings growth rate of 1.3% and 2.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 30 days. EXC has a current dividend yield of 4.05% and a beta of 0.52.
Ameren Corp. (AEE - Free Report) has been benefiting from its systematic investments in infrastructural upgrades and renewable expansion. Profitable returns earned from such investments enable AEE to reward its shareholders with solid dividend payouts. AEE aims to spend up to $20.8 billion in the 2024-2028 period, with a dividend payout target of 55-65%.
Ameren has an expected revenue and earnings growth rate of 2.4% and 5.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 30 days. AEE has a current dividend yield of 3.34% and a beta of 0.44.
American Electric Power Co. Inc. (AEP - Free Report) owns the United States' largest electricity transmission system, with 40,000 circuit miles of transmission lines. To further strengthen its grid, AEP plans to invest $43 billion during the 2024-2028 period. Such investments should enable AEP to achieve a long-term earnings growth rate of 6-7%.
American Electric Power has an expected revenue and earnings growth rate of 6.1% and 6.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. AEP has a current dividend yield of 3.59% and a beta of 0.53.
California Water Service Group’s (CWT - Free Report) strategic investments in infrastructure should allow it to provide reliable water and wastewater services to its customers. CWT gains from the expansion of its operations through acquisitions and organic activities. Management also increases shareholder value via dividend hikes. CWT is also enjoying benefits from rising demand from its expanding customer base.
California Water Service has an expected revenue and earnings growth rate of 19.7% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the last seven days. CWT has a current dividend yield of 2.11% and a beta of 0.47.