Infrastructure

Plunging Interest Rates Have Utilities Back in the Spotlight: 4 Top Buys

Lee Jackson

Published: August 8, 2019 6:25 am

Last Updated: January 30, 2020 5:38 pm

Just when savers and income investors thought it was safe to start buying certificates of deposit, rates have nosedived again. The combination of ongoing trade issues and the Chinese devaluation of its currency has investors bidding up U.S. Treasury debt again. In fact, the 30-year U.S. Treasury bond now trades with a 2.2% yield, the lowest in three years.

Typically when rates fall, income investors look to bond proxy stocks, which are typically safer and provide dependable income. The utility sector is a perfect fit, as companies pay dependable dividends and provide a service everybody has to have regardless of the economy.

A new RBC research report notes that despite some softer industrial demand, and weather conditions that drove second-quarter results for some companies lower on a year-over-year basis, the analysts remain positive on some of the top companies in the sector. We found four that look like outstanding picks now, and all are rated Outperform at RBC.

CenterPoint Energy

This top company makes the RBC list. CenterPoint Energy Inc. (NYSE: CNP) is a diversified public utility holding company headquartered in Houston. Its utility segment provides electric distribution and transmission as well as natural gas distribution services to over 2.4 million electric and 3.4 million natural gas customers.

Besides its utility business, CenterPoint also consists of a competitive natural gas sales and services segment. Moreover, it currently holds 54% of outstanding shares of Enable Midstream Partners.

Investors receive a 4.10% dividend. The RBC price target for the shares is $34, and the Wall Street consensus target is $30.85. The stock ended trading on Wednesday at $28.06.

Exelon

This top utility stock always makes good sense for conservative accounts. Exelon Corp. (NYSE: EXC) is a Fortune 100 energy company with the largest number of electricity and natural gas customers in the United States. It does business in 48 states, the District of Columbia and Canada, and it had 2018 revenue of $36 billion. Exelon serves approximately 10 million customers in Delaware, the District of Columbia, Illinois, Maryland, New Jersey and Pennsylvania through its Atlantic City Electric, BGE, ComEd, Delmarva Power, PECO and Pepco subsidiaries.

Exelon is one of the largest competitive U.S. power generators, with more than 32,000 megawatts of nuclear, gas, wind, solar and hydroelectric generating capacity, comprising one of the nation’s cleanest and lowest-cost power generation fleets. The Constellation business unit provides energy products and services to approximately 2 million residential, public sector and business customers.

Shareholders receive a 3.22% dividend. RBC has a $54 price target, while the consensus target is $52.44. Shares ended Wednesday at $45.01.

Pattern Energy

RBC also favors this top-performing yieldco. Pattern Energy Group Inc. (NASDAQ: PEGI) is an independent power company that has a portfolio of 26 renewable energy projects with an operating capacity of approximately 4 gigawatts in the United States, Canada and Japan that use proven, best-in-class technology. Pattern Energy’s wind and solar power facilities generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business.

While it is better suited for more aggressive accounts, investors that do have a higher risk tolerance can look at the company’s large dividend and environmentally friendly business profile as positives when investing.

Shareholders receive a 7.46% dividend. The $24 RBC price objective compares with the $24.57 consensus target. The stock closed most recently at $22.63.

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Southern Company

This large-cap leader also makes sense for very conservative accounts. The Southern Company (NYSE: SO) has four utility subsidiaries: Alabama Power, Georgia Power, Gulf Power (Florida) and Mississippi Power. Georgia and Alabama are the most significant and represent about 80% of earnings.

The utility businesses comprise 35,000 megawatts of power generation and 4.4 million customers. The nonregulated arm, Southern Power, owns and operates 7,600 megawatts of gas-fired power plants with the vast majority of the output signed up under long-term power contracts.

Shareholders receive a 4.32% dividend. RBC has set its price target at $52. The consensus target is $48.85, and shares closed at $57.45.

These four top dividend utility stocks do not have to worry about the threat of rising interest rates as they actually look to stay low for the foreseeable future. With the 30-year Treasury yielding only 2.26%, these are all better investments today for those seeking income. For those worried about the stock market, it definitely makes sense to move to these super-safe sector leaders.