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Utility stocks, a popular haven for dividend investors, have lost some power this year as investors pile into technology names and other growthier parts of the market.
Utilities aren’t alone. The relative strength of a basket of defensive stocks, including consumer staples, utilities, and healthcare, against a basket of all other sectors “fell to its weakest level in 23 years in early September,” notes Bespoke Investment Group.
Still, utility stocks have had an especially hard time of late. The
Utilities Select Sector SPDR
exchange-traded fund (ticker: XLU), a proxy for large-cap utilities, is down 7% year to date, dividends included_the worst performer of the S&P 500’s 11 sectors.
By contrast, technology stocks in the S&P 500 have gained 38% through Sept. 18, Communication services was up 44%.
Nevertheless, there could be a silver lining for utility shares. Income-seeking investors looking for stable and growing dividends have a chance to at least nibble at stocks in an attractively valued sector. The relative valuation of utilities versus the S&P 500 is at “near historic lows,” says Teresa Ho Kim, an equity research analyst at J.P. Morgan Asset Management.
Adds Stephanie Link, chief investment strategist at Hightower Advisors: “You can get some of the biggest utilities in the country for pretty cheap multiples.”
Bobby Edemeka, a portfolio manager of the
PGIM Jennison Utility
fund (PRUAX), expects annual dividend growth for electric utilities to average around 5%, in line with earnings growth. “The fundamental outlook for utilities continues to be very, very strong,” says Edemeka.
The poor showing of utility stocks has been chalked up to several factors—one being rising bond yields. The Utility Select Sector SPDR ETF was recently yielding about 3.3%. That’s attractive for stocks, but it’s well below the 10-Year U.S. Treasury’s recent yield of 4.32%.
Until the Federal Reserve began to raise short-term rates early last year, utility stocks had the upper hand over many bonds for a long time.
These higher yields have increased borrowing costs for utilities, which tend to be very capital intensive as they build out their grids and related infrastructure.
No one knows just when the Federal Open Market Committee will decide to stop raising short-term interest rates and pivot to cutting rates. What we can know is that the FOMC is a lot closer to the end of its rate-tightening regimen than the beginning.
Whenever that turn does occur, it will take some pressure off the utility sector. “You’ve got to stay patient,” says Link, referring to utility stocks. “It is a real challenge at this point in the near term.”
One of her holdings is
American Electric Power
(AEP). The company, based in Columbus, Ohio, has a sizable geographic footprint that stretches over 11 states, including Michigan, Texas, Virginia, and Tennessee. It serves about 5.6 million U.S. customers with about 40,000 miles of transmission lines.
The stock, which yields 4.2%, has returned minus 13% this year, including dividends.
The company has faced some setbacks such as announcing earlier this year that it had terminated an agreement to sell its Kentucky subsidiary. And Texas regulators recently rejected $2 billion of planned renewable energy projects for Southwestern Electric Power, one of American Electric’s regional utilities, according to Morningstar.
Like other utilities, American Electric Power is spending heavily on capex to improve its grid and other infrastructure, including building out its production of renewable energy. Most of the company’s nearly $40 billion in capital spending through 2027 is for regulated investments—that is, utility assets that are overseen by government regulators, according to Morningstar.
Investors often prefer the stability and returns that these assets offer as opposed to businesses subject to the ups and downs of daily pricing.
To revamp its portfolio, American Electric Power is unloading assets. The company, for instance, announced last month that it had sold its 1,365-megawatt unregulated, contracted portfolio of renewable energy assets, including wind and solar.
Link says she is keeping close tabs on the company’s spending, including its capex. “They can get more efficient at what they are doing,” she says. “It really is a [return on equity] story. They have to improve that.”
| Company / Ticker | Dividend Yield | YTD Return | Market Value (bil) | 2024E P/E Ratio |
|---|---|---|---|---|
| American Electric Power / AEP | 4.2% | -13.2% | $41.2 | 14.3 |
| CenterPoint Energy / CNP | 2.6 | -1.4 | 18.2 | 17.9 |
| NiSource / NI | 3.6 | 3.2 | 11.4 | 16.5 |
Note: Data through Sept. 19; E=estimate
Source: Bloomberg
Portfolio manager Edemeka likes
CenterPoint Energy
(CNP), a Houston-based electric and gas utility. The company’s portfolio includes electric transmission and distribution, power generation and gas distribution. It operates in seven states, including Texas.
Edemeka is confident the company can generate earnings per share growth of around 8% through next year, per CenterPoint’s guidance, and at the mid to high end of 6-8% from 2025 through 2030—helped by strong population growth in the Houston area. Its holdings include Houston Electric. “It has one of the highest growth rates in the country,” says Edemeka. “The Texas economy continues to do well.”
Dividends, he says, should grow in line with the company’s earnings.
The stock, which has returned about minus 1% this year, yields 2.6%.
Another of his holdings is
NiSource
(NI), a large regulated utility based in Indiana. It distributes natural gas and electricity to more than three million customers. Its six-state footprint includes Kentucky, Pennsylvania and Maryland.
The stock, which yields 3.6%, is up about 3% this year. Edemeka calls the company’s earnings guidance of 6% to 8% a year through 2027 “a very realistic outlook with upside potential.”
Travis Miller of Morningstar observed in a note last month that NiSource stock’s yield and what he foresees as a “7% annual earnings growth outlook for the next five years, offer investors what we consider [to be] an attractive total return.”
Miller expects NiSource to close its $2.15 billion minority interest sale of its Indiana utility by the end of this year, “eliminating most financing needs in 2024.”
Utility stocks are down at the moment—but their dividends are far from out.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com
Rising bond yields are rattling markets, luring investors with attractive rates while exerting pressure on pockets of equities such as the real estate and utilities sectors.
“Elevated Treasury yields have dragged on relative performance for REITs and utilities,” said Katie Stockton, founder of technical research firm Fairlead Strategies, in a note Wednesday.
The…
(Bloomberg) — Puerto Rico’s bankrupt power utility has reached a deal with BlackRock Financial Management and Nuveen Asset Management to slash its debt load by about 75%, even as other creditors have said they oppose the accord.
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The island’s federally-appointed financial oversight board, which is managing Puerto Rico Electric Power Authority’s bankruptcy, struck the agreement with a new group of investors holding $2.4 billion of utility debt including BlackRock, Nuveen, Franklin Advisers, Taconic Capital Advisors and Whitebox Advisors. The deal aims to reduce combined claims of $10 billion down to about $2.5 billion of new bonds.
Other creditors including GoldenTree Asset Management, Syncora Guarantee and Assured Guaranty have said they may fight the accord in court. The parties may hash out some of their disagreements before US District Court Judge Laura Taylor Swain, who’s set to hold a hearing on Wednesday.
After Puerto Rico reduced tens of billions of general obligation debt and sales-tax bonds through consensual restructuring agreements, the bankruptcy of Prepa, as the utility is called, is proving to be much more contentious. The deal would give bondholders who sign the agreement 12.5 cents on the dollar on what they were owed when Prepa entered bankruptcy in July 2017, and 3.5 cents for investors who decline to join the restructuring plan.
“We understand that the terms of the plan — which reflect the current realities — may be difficult to accept for some, but we still hope we can get more bondholders to join the agreement and that this will end Prepa’s bankruptcy once and for all,” David Skeel, chair of the oversight board, told reporters Friday.
A Prepa bond with a 5% coupon and maturing in 2032 last traded on Aug. 17 at an average price of 37.4 cents on the dollar, down from around 65 cents at the start of the year, according to data compiled by Bloomberg.
While the deal helps to push forward a six-year bankruptcy that’s been delayed by Puerto Rico’s own debt restructuring, hurricanes and the pandemic, potential appeals from creditors and bond insurers could prolong the workout. Prepa needs to modernize its old and neglected power grid to stabilize electricity rates and end chronic blackouts.
“Prepa will remain a sustainable utility, continue critical investments and complete the transformation of Puerto Rico’s energy system to provide more reliable energy and support Puerto Rico’s economic growth and fiscal stability,” Robert Mujica, the board’s executive director, told reporters on Friday.
The deal is part of a debt-cutting proposal the oversight board filed to the court on Friday and is the last major piece of Puerto Rico debt that needs to be restructured. It includes a new monthly charge of $8.71, on average, for some residents to repay the new bonds. Many Puerto Ricans object to any kind of additional electricity fee as they already pay some of the highest rates in the US. The island’s Energy Bureau, an independent energy regulator, would need to approve any new fee.
Skeel and Mujica are hoping the court will hold a confirmation hearing on the plan sometime in January. They anticipate it will need to go through another solicitation process where all bondholders, including individual investors, vote on the plan.
Creditors Split
Judge Swain in March dealt a blow to bondholders when she ruled that they only had a secured claim to about $16 million that Prepa had already deposited into reserve accounts. In June she capped their right to the utility’s net revenue at $2.38 billion, a small portion of the nearly $9 billion of bonds and loans Prepa had outstanding when it entered bankruptcy.
Those rulings split the original ad hoc bondholder group represented by Kramer Levin Naftalis & Frankel, and which has now disbanded.
BlackRock in May hired Paul, Weiss, Rifkind, Wharton & Garrison to help restructure certain bonds, according to court documents. Nuveen and the other firms joined with BlackRock earlier this month.
GoldenTree Asset Management, which held $835 million of Prepa debt, as of Aug. 14, claims it was excluded from the bondholder negotiations and has said it would seek an appeal of the board’s current proposal.
Invesco Advisers, which held $604 million of Prepa debt as of Aug. 14, and was a former member of the Kramer Levin group, has declined to join the BlackRock pool or GoldenTree’s attempt to lift a stay on putting in a receiver, according to court documents.
Dominic Federico, Assured Guaranty’s chief executive officer, described the board’s current offer in an Aug. 9 earnings call as “insulting” and said the insurer would seek litigation. The company guaranteed $446 million of Prepa’s net par debt, as of March 31.
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