Infrastructure

Utilities Catch Downgrades as Recession Realities and Dividend Risks Set In

Jon C. Ogg

Just 30 to 60 days ago, the utilities sector was about as strong as iron. Then the coronavirus pandemic suddenly delivered a recession. Millions and millions of Americans, and businesses small and large, were suddenly either without income or at risk of having no income. This was unprecedented, and the mighty utility industry found itself in a position where a large portion of the customers either cannot pay or will be seeking assistance to pay for their utilities. This is a potentially significant risk to future earnings, and that means there is even an unthinkable scenario in which many of their dividends could actually be at risk.

Perhaps the good news is that with a government rescue package for citizens and for businesses, maybe things won’t get as bad as some had hoped. The bad news is that utilities’ earnings and revenues are going to be pressured for some time. Many have pledged that they will not cut off customers who cannot pay for their services. Some even went as far as to say that those who had been cut off in prior weeks will have their services restored.

When you add up a scenario of continually high expenses to keep providing services and one in which customers are going to be late paying in future collections, it doesn’t look good for the utilities. This is also at a time when interest rates and gas prices being so low should have helped out. That’s so “bull market thinking” now.

A large sector call from Barclays shows just how much the expectations are coming down for the major utilities in America. Many of those old price targets are unfortunately now simply viewed as a fairy tale. Sadly, the firm had just upgraded some of these stocks in recent weeks. As utilities are now facing more risks, some of these Barclays target price cuts were by more than 20% due to the uncertainty.

We also looked for other large calls on utilities, but many analysts have yet to adjust their target prices. That means more analyst downgrades, or at least more earnings and target price cuts, are likely coming in the days and weeks ahead.

Alliant Energy Corp. (NASDAQ: LNT) was trading up 2% at $45.23 on Thursday, in a 52-week range of $37.66 to $60.28. The former consensus target price is $57.88, and the yield is 3.4%. Barclays maintained it as Overweight and cut the target to $48 from $60.

American Electric Power Co. Inc. (NYSE: AEP) was trading up 6% at $77.68, in a 52-week range of $65.14 to $104.97. The former consensus target price is $101.31 and its yield is 3.8%. AEP was maintained as Overweight at Barclays, but the firm cut its target price to $82 from $107. Both KeyBanc (March 13) and Morgan Stanley (March 10) upgraded it to Overweight, with target prices of $93 and $102, respectively.

Ameren Corp. (NYSE: AEE) was up 5% at $70.75, in a 52-week range of $58.74 to $87.66. The former consensus target price is $89.27, and the yield is 2.9%. Barclays maintained its Equal Weight rating but slashed its target to $65 from $85.

CenterPoint Energy Inc. (NYSE: CNP) was trading up 4.5% at $15.82, in a 52-week range of $11.58 to $31.17. The former consensus target price is $23.70, and the yield is 7.7%. CenterPoint Energy was kept as Equal Weight but its target was cut to $15 from $20 at Barclays.

CMS Energy Corp. (NYSE: CMS) traded up 6% at $56.43, in a 52-week range of $46.03 to $69.17. The former consensus target price is $68.60, and the yield is 3.1%. Barclays maintained its Equal Weight rating but cut its target from $67 to $51.

Consolidated Edison Inc. (NYSE: ED) was up 2% at $72.77, in a 52-week range of $62.03 to $95.10. The former consensus target price is $89.27. The yield is 4.3%. Barclays reiterated ConEd as Underweight but cut its target to $64 from $83.