Infrastructure

Continued Low Interest Rates Keep This Super-Safe Sector Hot

Lee Jackson

Published: April 30, 2019 7:25 am

Last Updated: January 30, 2020 9:23 pm

For years after the great recession and the near collapse of the equity and debt markets in 2008 and 2009, interest rates were hammered to levels that were the lowest in the United States and across the globe since the 1950s. The Federal Reserve kept the federal funds rate at zero for years, and after numerous rate increases over the past three years, it now sits at a more normalized 2.5%.

While the fed funds rate is somewhat normalized, the rest of the yield curve is either extremely flat or, in some maturities, slightly inverted. In fact, the yields on every maturity from the one-month note to the seven-year one are below the fed funds rate, and the 10-year Treasury bond is barely over at a 2.53% yield.

What this means for investors is that sectors that are defensive and provide income, which generally are under pressure as rates move higher, remain solid investment alternatives for conservative accounts.

One of the best sectors to own for safety and consistent dividends is the utilities. A new SunTrust research report, while by no means pounding the table, does remain positive on some of the top companies in the sector. We screened the SunTrust utility stocks looking for Buy-rated companies and found four that make good sense.

AEP

This industry-leading utility is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.4 million customers in 11 states. It 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.

Many on Wall Street feel that the stock trades at a discount to its utility peers, and they feel it deserves a premium. Top analysts also think the company may sell generating assets and buy back shares with the proceeds, which would be also accretive.

AEP shareholders receive a 3.19% dividend. The SunTrust price target for the shares is $91, while the Wall Street consensus target is $84.19. Shares closed on Monday at $84.04.

AES

This off-the-radar choice has solid upside potential from current levels and is a top mid-cap pick at SunTrust. 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 uses a range of fuels to generate electricity, including natural gas, coal, hydro, wind, energy storage, oil, diesel, petroleum coke, biomass, landfill gas and solar. The company owns and operates a generation portfolio of approximately 29,352 megawatts. It has operations in the United States, Chile, Colombia, Argentina, Brazil, Mexico, Central America, the Caribbean, Europe and Asia.

AES shareholders receive a 3.17% dividend. SunTrust has a $20 price objective, and the consensus target price is $18.11. Shares closed most recently at $17.22.

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Edison International

This top utility 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 receive a 3.87% dividend. The $77 SunTrust price objective compares with the $71.21 consensus figure. Shares closed Monday at $63.30.

PPL

This rounds out the SunTrust Buy-rated utility stocks that pay big dividends. PPL Corp. (NYSE: PPL) serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties, and 543,000 customers in 77 Kentucky counties and five counties in Virginia. The company also provides electric delivery services to approximately 1.4 million customers in Pennsylvania and operates electricity distribution network for the Midlands, South West, and Wales in the United Kingdom.

In addition, the company offers a range of customer-care and back-office services to competitive retail energy suppliers, including customer enrollments; contract management; electronic data exchange; simple and complex billing; and call center operations comprising telemarketing, payment processing and collections of overdue accounts.

Investors receive a 5.40% dividend. The SunTrust price target is $36. The consensus target is $32.12, and PPL closed at $30.57 a share.

As we have noted in the past, the huge capital gains for the sector from the quantitative easing days are in the rearview mirror, but that doesn’t change the upside potential for these top stocks. With fed funds rate increases unlikely the rest of 2019, any increase in 2020 will remain small and should have a negligible effect. In fact, some are calling for the Federal Reserve to actually cut rates. These top stocks make excellent additions to growth and income total return portfolios looking for safety the rest of 2019.