Between 2013 and 2015, the utility sector had one of the biggest runs in its history. Declining interest rates, combined with a big market scare near the end of 2011 had investors seeking the relative safety and the big dividends the industry provides. That all changed about this time last year, as the market, fresh from the first rate increase in years, saw the proverbial writing on the wall and the selling started.
While the halcyon days for the utility sector are probably over, the analysts at Jefferies feel that some of the top players could benefit from the potential benefit of lower corporate taxes under the Trump administration. In a new research report, they note this:
We expect many earnings calls to be focused on the potential impacts of a lower corporate tax rate, as the other changes proposed thus far by Trump and the GOP. Since the election, we have seen stronger performance from companies with exposure to unregulated businesses (i.e. merchant power, MLP, etc.), and weaker performance from regulated utilities and companies with higher parent leverage.
Jefferies has 15 utility companies in their research universe, but only four are rated Buy. While the huge run is over, an allocation to dividend paying utilities makes sense in a well-rounded growth and income portfolio.
This is an old-school stock that offers investors the stability and track record many seek now. Consolidated Edison Inc. (NYSE: ED) offers electric services to approximately 3.4 million customers in New York City and Westchester County; gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County; and steam to approximately 1,700 customers in parts of Manhattan.
The company owns 62 area distribution substations and various distribution facilities; 39 transmission substations and 62 area stations; electric generation facilities with an aggregate capacity of 724 megawatts that run on gas and fuel oil; 4,348 miles of mains and 369,791 service lines for natural gas distribution; and one steam-electric generating station and five steam-only generating stations.
The company operates 572 circuit miles of transmission lines; 14 transmission substations; 86,794 in-service line transformers; 3,994 pole miles of overhead distribution lines; and 1,889 miles of underground distribution lines, as well as 1,867 miles of mains and 105,482 service lines for natural gas distribution. In addition, it is involved in the sale and related hedging of electricity to retail customers, as well as the provision of energy-related products and services to wholesale and retail customers.
Further, the company develops, owns and operates renewable and energy infrastructure projects, and it invests in transmission companies. It primarily sells electricity to industrial, commercial, residential and governmental customers.
Its shareholders are paid a 3.65% dividend. The Jefferies price target for the stock is $82.50, and the Wall Street consensus target is at $72.89. The shares closed Thursday at $73.49 apiece.
With the potential for a very cold winter still on tap, this company may look to extend solid 2016 gains into this year.
DTE Energy Inc. (NYSE: DTE) is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide.
The company’s operating units include an electric utility serving 2.1 million customers in Southeastern Michigan and a natural gas utility serving 1.2 million customers in Michigan. The DTE Energy portfolio includes non-utility energy businesses focused on power and industrial projects, natural gas pipelines, gathering and storage, and energy marketing and trading.
DTE recently declared an $0.825 per share dividend on its common stock payable. That is a 7.1% increase from the previous quarterly dividend and reflects the board’s confidence in the company’s growth plans. This hike continues DTE Energy’s consistent dividend history, having issued a cash dividend for more than 100 years.
DTE shareholders are paid a very solid 3.36% dividend. Jefferies has a $103 price target for the stock. The consensus price objective is listed at $101.42. The stock closed Thursday at $98.14 per share.