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Top 5 Utility Stocks Set to Gain on Possible Interest Rate Cuts

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Wall Street is keenly waiting for the outcome of the Fed’s most crucial FOMC meeting scheduled Sept. 17-18. Market participants are highly enthusiastic about the beginning of the low interest rate and accommodative monetary regime. The CME FedWatch tool currently shows a 100% probability of a 25-basis-point rate cut along with a 35% chance of a 50-basis-point rate cut this month.  

Under this scenario, the utility sector is in focus. 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 this stage, we have selected five utility stocks for investment. These are NiSource Inc. (NI - Free Report) , American Water Works Co. Inc. (AWK - Free Report) , Xcel Energy Inc. (XEL - Free Report) , Evergy Inc. (EVRG - Free Report) and DTE Energy Co. (DTE - Free Report) . 

These companies have positive (single-digit) earnings per share (EPS) growth potential for next year along with stable revenue growth on a year-over-year basis. These stocks are regular dividend payers. Each of our picks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Utilities Sector Surprisingly Flourishes in 2024

The utilities sector is generally defensive in nature. U.S. stock markets witnessed an impressive bull run in 2023, but the utility sector suffered a blow. Of the 11 broad sectors of the market’s benchmark — the S&P 500 Index — the Utility sector declined more than 11%.

Wall Street’s bull-run continues in 2024 too. Surprisingly, the defensive utilities sector has become a major part of this year’s rally so far. Year to date, of the 11 broad sectors of the S&P 500 Index — the utilities sector has turned as best performer rallying 21.7%.

The chart below shows the stock price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

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.

Buy 5 Utility Stocks Set to Benefit From Interest Rate Cuts 

NiSource Inc.

NiSource expects to invest $16.4 billion through 2028 in modernizing infrastructure, which will enhance the reliability of its operations. Within 18 months, nearly 75% of NI’s investment was recovered through rate hikes, providing to carry on infrastructure upgrades. NI continues to add clean assets to its portfolio and retire coal-based units. NI has enough liquidity to meet debt obligations.

NI Share Has Strong Next-Year EPS and Revenue Potential 

For next year (ending December 2025), NiSource has a projected EPS and revenue growth rate of 6.8% and 12.1%, respectively. NI has a current dividend yield of 3.2%. The stock price of NiSource has jumped 18.9% in the past three months.

American Water Works Co. Inc.

American Water Works has been gaining from contributions coming from acquired assets and military contracts. Investments in infrastructure will assist AWK to efficiently serve its customers. New water and wastewater rate hikes are also boosting AWK’s performance. AWK continues to expand its operations through organic and inorganic initiatives. AWK has ample liquidity to meet its debt obligations.

Solid Next-Year EPS and Revenue Potential for AWK Stock

For next year (ending December 2025), American Water Works has a projected EPS and revenue growth rate of 8% and 3.1%, respectively. AWK has a current dividend yield of 2.1%. The stock price of American Water Works has surged 15.6% in the past three months.

Xcel Energy Inc.

Xcel Energy is poised to benefit from its solid capital investment plan for infrastructure strengthening and clean power generation. XEL is reducing coal usage and targets to lower emissions by at least 80% by 2030 and achieve carbon neutrality by 2050. XEL’s expanding customer base and rising demand act as tailwinds.

XEL Stock Has Impressive Current Dividend Yield

For next year (ending December 2025), Xcel Energy has a projected EPS and revenue growth rate of 8% and 6.2%, respectively. XEL has a current dividend yield of 3.5%. The stock price of Xcel Energy has climbed 16.5% in the past three months.

Evergy Inc.

Evergy continues to benefit from its expansion of operations in the transmission market through collaborations, strategic acquisitions and partnerships. Through planned investments and the Integrated Resource Plan, EVRG aims to add more renewable assets and become carbon neutral by 2045. EVRG improves shareholders’ value through dividend payments and has enough liquidity to meet debt obligations.

Robust Current Dividend Yield for EVRG Share

For next year (ending December 2025), Evergy has a projected EPS and revenue growth rate of 4.9% and 2%, respectively. EVRG has a current dividend yield of 4.3%. The stock price of Evergy has appreciated 13.7% in the past three months.

DTE Energy Co.

DTE Energy follows a disciplined capital spending program to maintain and upgrade its infrastructure to enhance the reliability of its utility systems. DTE plans to make investments worth $20 billion over the 2024-2028 period. DTE is actively promoting clean energy through its MIGreen Power program and aims to achieve the zero-carbon emission target by 2050.

DTE Stock Has Strong Next-Year EPS and Revenue Estimate

For next year (ending December 2025), DTE Energy has a projected EPS and revenue growth rate of 7.3% and 4.3%, respectively. DTE has a current dividend yield of 3.3%. The stock price of DTE Energy has advanced 11.4 % in the past three months.

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