Utility Stocks Making Comeback on Hopes for Stimulus Plan
Last week, the utilities sector was a train wreck. The industry’s predictable earnings and high dividends had essentially replaced ultra-safe instruments like certificates of deposit as a safe haven against both inflation and recession. That no longer seemed to be the case.
What happens to earnings predictability and dividend payments for even the safest of companies when the world is turning upside down and when millions of customers’ jobs vaporize simultaneously?
Now that the U.S. Senate and House are nearing an agreement on a stimulus package to provide individual and business relief from the effects of the sudden braking of the U.S. economy, the industry is getting a much-needed boost.
Over the past month, the S&P 500 Utilities Sector SPDR (NYSEAMERICAN: XLU) had dropped by more than 36% as of Monday’s close. The shares added 5.7% on Tuesday, but that’s still an annual drop of nearly 18%. From the peak on February 18, the exchange-traded fund has lost nearly 45%.
A report from Fitch Ratings last week elaborated on the problem:
US public power systems are expected to face limited immediate credit pressures related to the spread of the coronavirus, but an economic slowdown will weigh on longer-term performance, says Fitch Ratings. Significantly lower electric demand poses the most significant near-term risk for public power systems. While Fitch expects most systems to support revenue requirements and operating margins by raising retail rates, declining levels of employment and household income could strain affordability metrics over time and undermine rate-setting strategies, weakening credit quality.
Disguised among the longer-term issues was the near-term hit to utility sector revenues from a government-mandated payment holiday. Under the House stimulus plan, utility companies would have been banned from turning off water, power and heat until the crisis was over. That could have slashed utility revenues by 10% or more.
The jolt to utility stocks on Tuesday indicates that investors believe that any bill that comes out of the current negotiations will include a provision to reimburse utilities for their forced cooperation. If governments are going to admonish (or, in some cases, force) people to stay home, the utilities and their investors expect to be paid back, eventually.
The unprecedented danger of the coronavirus outbreak has caused millions of Americans to be added to the unemployment rolls and stripped away revenues from businesses of all sizes. By putting cash in the hands of U.S. households and businesses, the federal government can essentially replace the roughly $800 billion a month in U.S. GDP that is in jeopardy due to the disease.
Looking at a couple of the nation’s largest utilities, Next Era Energy Inc. (NYSE: NEE) traded up 7% Tuesday morning, at $194.38 in a 52-week range of $174.80 to $283.35. NextEra’s dividend yield is 3.08%.
Dominion Energy Inc. (NYSE: D) traded up about 8.3% to $64.30, in a 52-week range of $57.79 to 90.89. Dominion’s yield is 6.33%.
Duke Energy Corp. (NYSE: DUK) traded up about 6%, at $68.05 in a 52-week range of $62.13 to $103.79. The dividend yield is 5.89%.