Why One Red-Hot Sector May Go Even Higher as Interest Rates Plunge

Typically, falling interest rates are a positive for business and consumers, as the cost of borrowing drops dramatically. Home refinancing has jumped as mortgage rates are near the lowest levels in five years. The steep drop in interest rates this time around is not the result of a lower federal funds rate but nervous investors piling into the safety of U.S. Treasury debt. With the 30-year Treasury bond yielding a paltry 2.73%, a 52-week low, some investors have looked elsewhere.

The sector nervous investors have considered is the one that always becomes attractive when the markets get rocky. With trade worries rocking an already overbought market, the conservative and dependable utility sector could go much higher. In fact, the sector hit yet another 52-week high on Thursday as the market plummeted.

Utilities provide electricity, among other things, and that is one product that everyone uses, regardless of what the stock market is doing, (though costs vary from state to state). While utilities are a lousy bet when rates shoot higher, they are the perfect holding for safety and dependable dividends when rates drop and the market is volatile.

We screened the Merrill Lynch utility coverage universe and found four top stocks that look like stellar buys for conservative and worried investors. The firm has a Buy rating on them all.

American Electric Power

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.

AEP shareholders receive a 3.04% dividend. The Merrill price target for the stock is $93, while the Wall Street consensus target is $84.19. Shares closed on Thursday at $88.18.

Consolidated Edison

This old-school stock offers investors the stability and track record many seek now. Consolidated Edison Inc. (NYSE: ED) offers electric services to approximately 3.5 million customers in New York City and Westchester County; gas to around 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County; and steam to about 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 3.35% dividend. Merrill has a $93 price target, and the consensus target is $80.65. Shares closed at $88.38 on Thursday.


This higher yielding utility makes the buy list at Merrill. 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.

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 3.66% dividend. The $109 Merrill price target compares with the $85.82 consensus figure. Shares closed Thursday at $99.35.

First Energy

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 is dedicated to safety, reliability and operational excellence. Its 10 electric distribution companies form one of the nation’s largest investor-owned electric systems, serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York. The company’s transmission subsidiaries operate more than 24,500 miles of transmission lines that connect the Midwest and Mid-Atlantic regions.

Shareholders receive a 3.52% dividend. Merrill has set a $48 price objective. The consensus target price is $36.25, but shares closed most recently at $43.15.

Four top dividend utility stocks to consider for those worried about the stock market and for income investors appalled by the thought of buying 30-year debt that yields less than 3%. Note that these four stocks have run hard, so it may make sense to buy partial positions and see if they don’t back up some.

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