Beyond Interest Rate Hikes, Problems or Contrarian Dream for Utilities Stocks?

The utilities sector has been one of the key sources for income investors to get dividends. 24/7 Wall St. once went as far as to say that utilities had become “the new CD market” for retirees and income investors. Well, it turns out that 2015 has not been very kind to the utilities sector, ahead of the Federal Reserve’s expected interest rate hike cycle into 2016.

Utilities are substantial borrowers of capital, via debt of course. So higher interest rates drive up their fixed borrowing costs, which drives up their operating costs, in a manner that may not be offset by price hikes.

Going into 2016 could spell even more trouble for utilities. The Federal Reserve’s report on industrial production and capacity utilization for November was particularly brutal for the utilities sector. The blame is on exceptionally warmer weather (like 65 degrees in New York City), but the reality is that the manufacturing, energy, mining and other industrial efforts all are in the red. So unless everyone is charging up electric cars and keeping all their lights on and appliances running on overdrive, it means that utilities are suffering from more than just warm weather.

As far as the utility stocks themselves, one thing that long-term investors might want to consider is whether things simply got too negative. Could the contrarians be setting up for a dream trade in 2016 and beyond?

Some of the utilities actually are rising ahead of rate hike decision and after the poor output and capacity reports. 24/7 Wall St. has outlined the performance for the four top utilities and for the key utilities exchange traded fund to show how the markets are reacting here.

Duke Energy Corp. (NYSE: DUK) shares were last seen trading up 1.5% at $69.87, with a consensus analyst price target of $75.42 and a 52-week trading range of $65.50 to $89.97. The company also has a market cap of $48 billion and a dividend yield of 4.9%. Duke’s stock performance is down 14% year to date.

NextEra Energy Inc. (NYSE: NEE) saw its shares recently trading up 2.9% at $101.61. The stock has a consensus price target of $118.32 and a 52-week range of $93.74 to $112.64. The market cap is nearly $47 billion, and the dividend yield is 3.2%. NextEra’s drop in 2015 has been just over 4%.

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