If there is any sector that is safe when the going gets treacherous it’s the utilities, and with good reason. Regardless of the economy or other circumstances that affect consumers and business, people have to have power, and the utility companies provide it. While many would say they are a bad bet in a rising-rate environment, the bottom line is interest rates are still at generational lows and will remain there even if the Federal Reserve lifts rates three times this year.
We screened the Merrill Lynch research universe for utilities that are rated Buy. We found five that make good sense now for nervous investors that also need dependable income.
American Electric Power
This industry leader is a solid dividend payer and remains a top utility pick in the Merrill Lynch US 1 list. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states.
The company ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
American Electric Power shareholders receive a 3.91% dividend. The Merrill Lynch price objective for the shares is $75, and the Wall Street consensus estimate is $74. Shares closed on Thursday at $63.38.
This old-school stock 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, and the provision of energy-related products and services to wholesale and retail customers.
Shareholders receive a 3.83% dividend. Merrill Lynch has an $83.50 price target, and the consensus target is $80.65. Shares closed Thursday at $74.73.
Shares of this top utility got hit hard in December and are still offering a solid entry point, and it continues to raise its dividend regularly. Edison International (NYSE: EIX) is the parent holding company of Southern California Edison, which is an investor-owned public utility primarily engaged in supplying and delivering electricity in Los Angeles and southern California.
The company’s service area contains a population of 15 million people, and Southern California Edison serves the population through approximately 5 million customer accounts. It also holds the Edison Energy subsidiary, which is a nonregulated business that operates across a range of related industries.
Shareholders are paid a 4.17% dividend. The $70 Merrill Lynch price objective is in line with the consensus target price of $70.73. The stock closed Thursday at $58.07.
This higher yielding company makes the buy list at Merrill Lynch. Entergy Corp. (NYSE: ETR) is an integrated energy company engaged primarily in electric power production and retail distribution operations. It owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including nearly 10,000 megawatts of nuclear power, making it one of the nation’s leading nuclear generators. The company delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy has annual revenues of more than $12 billion and approximately 13,000 employees.
Many analysts like the position of the company’s plants, as they supply some of the petrochemical industry along the Gulf Coast. Petrochemical plants and liquefied natural gas export facilities are springing up all across the central Gulf Coast. For the petrochemical industry, the boom is driven by demand, not supply, and so the current lower gas prices actually help this growth trend, which has been a solid revenue silo for Entergy.
Entergy investors receive a 4.94% dividend. Merrill Lynch has set its price target at $89. The consensus target is $85.82, and shares closed Thursday at $72.02.
This higher yielding stock also may have among the best total return potentials. FirstEnergy Corp. (NYSE: FE) is a conglomerate of 10 electric utilities, including Ohio Edison, Cleveland Electric Illuminating, Pennsylvania Power, Toledo Edison, Jersey Central Power & Light, Metropolitan Edison and Pennsylvania Electric. FirstEnergy also owns a large portfolio of competitive generation assets but has announced an exit from the business by mid-2018.
Shareholders receive a 4.7% dividend. The Merrill Lynch price objective is $36. The consensus price target is $36.25, and share closed on Thursday at $30.64.
These five top dividend utility stocks should not be avoided because of the threat of rising interest rates. The 30-year Treasury yields much less today than it did in 2014. For those worried about the stock market, it makes sense to move to these super-safe large-cap sector leaders.
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