While the argument continues over when exactly the Federal Reserve will raise rates for the first time in 2015, one thing seems pretty clear to all. The rate hikes will be in small steps and very measured, as inflation remains benign and the economy is hardly charging ahead full-steam. One sector that has been outstanding for investors over the past three years has been utilities, and while most of the big money may have been made, the analysts at Merrill Lynch make the case in a new research report that many fundamentals still favor keeping a position in the sector.
The Merrill Lynch team recently met with the Federal Energy Regulatory Commission (FERC), the Environmental Protection Agency (EPA) and staff from the Council of Environmental Quality at the White House to gather data. With some utilities considering transitions to real estate investment trust (REIT) status or spinning off yieldcos, the landscape is changing. We screened the Merrill Lynch utilities rated Buy for those currently providing investors with some of the higher yields.
AES Corp. (NYSE: AES) owns and operates power plants to generate and sell power to customers, such as utilities, industrial users and other intermediaries. The company also owns and operates utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors. It also generates and sells electricity to the wholesale market. AES has operations in the United States, Central and South America, the Caribbean, Europe, the Middle East, Africa and Asia.
AES investors are paid a 3.2% dividend. The Merrill Lynch price target for the stock is $15. The Thomson/First Call consensus target is higher at $15.40. Shares closed Monday at $12.73.
Dominion Resources Inc. (NYSE: D) is expected to grow the company dividend 7% this year, in line with the past four. The company pulled in operating revenue of $3.2 billion for the most recent three-month period, beating estimates by 4.8%. Although Dominion has boosted sales, it kept less than expected as profit. The company recently had some headline issues as a Virginia nuclear plant had some fuel rod issues. Fortunately, everything was contained with no environmental damage. Many analysts on Wall Street think that the new EPA bill may actually provide a tailwind for this top utility.
Dominion investors are paid a 3% dividend. Merrill Lynch has an $85 price objective, and the consensus target is $78.56. The stock closed Monday at $78.93 a share.
Edison International Inc. (NYSE: EIX) is a top utility to own and a stock that makes the Merrill Lynch US 1 list. The company raised the quarterly dividend paid to shareholders by 17.6% back in December. That signals a strong commitment to investors. Edison International generates electricity through hydroelectric, diesel, natural gas, gas fueled, combustion turbine, nuclear and photovoltaic sources. It supplies electricity primarily to residential, commercial, industrial, agricultural and other customers, as well as public authorities, through transmission and distribution networks.
Edison investors are paid a 2.4% dividend. The Merrill Lynch price objective is $72, and the consensus target is $69.35. The stock closed Monday at $68.34.
PPL Corp. (NYSE: PPL) remains a preferred utility stock to buy at Merrill Lynch. The company is among the leading utility companies in the United States that plan to continue to increase regulated operations and lower earnings volatility attached to competitive operations. Also, the company has diverse geographical operations, with operations in the United Kingdom as well. PPL raised cash and lowered debt late last year by selling some hydroelectric assets to NorthWestern energy.
PPL investors receive a solid dividend that comes in at 4.2%. Merrill Lynch has set a $37 price target, and the consensus target is higher at $38.07. PPL closed Monday at $35.71.
UIL Holdings Corp. (NYSE: UIL) is a smaller utility that could have solid upside for income accounts looking for conservative stocks. UIL is the parent company for United Illuminating Company, Connecticut Natural Gas Corporation, Southern Connecticut Gas Company and Berkshire Gas Company, each more than 100 years old. The company provides for the transmission and delivery of electricity and other energy related services for Connecticut’s greater New Haven and Bridgeport areas.
UIL investors are paid a very nice 3.65% dividend. The Merrill Lynch price objective for the stock is set at $45, and the consensus is at $43.75. The stock closed on Monday at $47.32, above both targets.
While utilities are hardly the momentum trader’s dream, they are solid additions to any portfolio and could have big upside if we sustain a cold and long-lasting winter. The big storm on the east coast is a good example of weather-related issues. Plus, if you are an investor worried about a serious market correction or sell-offs, there is no better place to be than in these stocks. When the market drops big, investors run to the safety and liquidity of the utilities sector.