Infrastructure

Why More Safe and Defensive Utilities Can Still Outperform in 2020

With stocks having hit all-time highs, at least ahead of the recent concerns about the coronavirus spreading, the utility sector also has enjoyed a run higher. A stable but not heated economy and what is expected to be a low and stable interest environment are adding to investors’ enthusiasm for the safety of a bond and an above-market dividend yield. With the market spooked about larger issues, investors are likely to keep a keen interest in utilities and other defensive sectors.

SunTrust Robinson Humphrey has previewed earnings for the electric utilities, and the firm sees upside in multiple companies. The firm’s Ali Agha projects positive earnings surprises from Edison International (NYSE: EIX) and Exelon Corp. (NYSE: EXC), but negative earnings surprises from Ameren Corp. (NYSE: AEE) and Pinnacle West Capital Corp. (NYSE: PNW), in their fourth-quarter earnings reports.

For the companies issuing 2020 guidance, Agha expects positive earnings surprises from Duke Energy Corp. (NYSE: DUK) and Evergy Inc. (NYSE: EVRG). Based on the latest peer valuations, SunTrust has raised formal price targets on multiple utilities.

In an effort to show relative performance and calls, we have included recent trading data, indicated dividend yields and compared Agha’s target prices on each to the consensus analyst target prices from Refinitiv. Additional commentary was provided on some of the more positive calls. Also worth noting for a baseline in comparing dividend yields is that the median dividend yield for the 18 electric utilities within the S&P 500 is about 2.95% at this point in January of 2020.

Agha said:

Excluding outliers, we are projecting a 9% average earnings increase in the fourth quarter, driven primarily by timing of O&M expenses and impact of rate increases. Looking forward, we project a 3% average earnings increase in 2020 and 5% in 2021… Based on our 2021 estimates, the SunTrust Robinson Humphrey Power Index is trading at a P/E multiple of 20.7x (a 26% premium to historic levels) and an EV/EBITDA multiple of 12.0x (a 21% premium).

American Electric Power Co. Inc. (NYSE: AEP) is rated as Buy and its target was raised to $109 from $105. Shares closed Friday at $102.16, in a 52-week range of $76.30 to $102.75 and with a consensus target price of $99.80. The market cap is $50 billion, and the dividend yield is 2.7%.

Duke Energy is rated as Hold and the target was raised to $102 from $92. Shares ended at $96.28 last week, with a 52-week range of $84.28 to $97.37 and a consensus target price of $97.56. The market cap is $70 billion, and the dividend yield is 3.9%.

Edison International has a Buy rating, and its target was raised to $90 from $88. It closed at $76.92 a share, in a 52-week range of $54.25 to $78.49. The consensus target price is $81.00. The market cap is about $28 billion, and the dividend yield is 3.3%.

Evergy has a Buy rating and its target price was raised to $75 from $73. Shares closed at $71.37, in a 52-week range of $54.57 to $71.84 and with a consensus target price of $67.38. The market cap is $16 billion, and the dividend yield is 2.9%.

Pinnacle West is rated as Hold, and it saw the target price raised to $103 from $93. The stock closed at $97.12, in a 52-week range of $84.26 to $99.81. It has a consensus target price of $93.77. The market cap is $11 billion, and the dividend yield is 3.2%.

PPL Corp. (NYSE: PPL) has a Buy rating, and its target price was raised to $41 from $40. Shares closed Friday at $36.53. The 52-week range is $28.55 to $36.82, and the consensus target price is $35.75. The market cap is $26 billion, and the dividend yield is 4.5%.

Southern Co. (NYSE: SO) has a Hold rating, and its target was raised to $69 from $63. Shares closed at $69.44, with a 52-week range of $47.11 to $70.03 and a consensus target price of $64.09. The market cap is $73 billion, and the dividend yield is 3.6%.

Vistra Energy Corp. (NYSE: VST) has a Buy rating and still has a $32 target price. Its shares closed Friday at $22.17, in a 52-week range of $21.33 to $27.96. The consensus price target is $33.40, and the market cap is over $10 billion. The stock yields 2.2%.

Investors should also consider that the media electric utility yield is more or less in-line with the approximate yield of the Utilities Select Sector SPDR Fund (NYSE: XLU). That is the largest and most active ETF tracking the broader utilities sector, and it tracks the Utilities Select Sector Index, although it holds independent producers of energy, water utilities and gas and renewable utilities, and it also holds diversified utilities.