Volatility has reappeared on Wall Street in August. The first three weeks of this month witnessed a reversal of the impressive bull run in the last seven months. However, U.S. stock markets regained momentum in the last week of August.
At this stage, it should be prudent to invest in defensive stocks like utilities with a favorable Zacks Rank to strengthen your portfolio. Out of the 11 broad sectors of the S&P 500 Index, the Utilities Select Sector SPDR (XLU) suffered the most in 2023 as market participants’ thrust shifted from defensive to growth/momentum stocks. Year to date, XLU is down 9.4%.
However, markets may remain volatile in the near future. Wall Street is currently in a “Catch 22 Situation.” Weak economic data will indicate that the Fed’s aggressive interest rate hike policy for one and half year has started giving fruitful results. On the other hand, this will also indicate a slowdown in economic activities. At present, investors are clueless regarding the outcome of the Fed’s September FOMC meeting.
Utilities Immune to Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. Such companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.
Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
Utility companies enjoy a reputation for being safe given the regulated nature of their business. This lends their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues.
Additionally, utilities are generally low-beta stocks (beta >0 but <1). At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option.
If the market’s northbound journey is reestablished, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the market’s downturn continues, low-beta stocks will minimize portfolio losses and dividend payments will act as a regular income stream.
Our Top Picks
We have narrowed our search to five low-beta utility stocks that are regular dividend payers. These stocks have good potential for the rest of 2023 and have seen positive earnings estimate revisions within the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy).
Consolidated Water Co. Ltd. CWCO currently utilizes the most advanced technology to convert seawater to potable water and meet customer needs. CWCO is expanding operations via acquisitions and organic projects. The acquisition of full ownership of PERC and the return of tourism to the Cayman Islands are expected to drive earnings. CWCO has enough liquidity to address its short-term debt obligations.
Consolidated Water Co. has an expected revenue and earnings growth rate of 53.2% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.3% over the last seven days. CWCO has a beta of 0.24 and a current dividend yield of 1.24%.
American Water Works Co. Inc. AWK is gaining from the implementation of new water systems and contributions from military contracts. Investments to upgrade its infrastructure will allow AWK to provide quality services to its expanding customer base. AWK continues to expand operations through organic and inorganic initiatives. Cost management is boosting margins. Our model projects an increase in revenues for the 2023-2025 period.
American Water Works Co. has an expected revenue and earnings growth rate of 7.1% and 6.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. AWK has a beta of 0.56 and a current dividend yield of 2.02%.
Atmos Energy Corp. ATO continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help to increase the safety and reliability of its natural gas pipelines. ATO gains from industrial customer additions and constructive rate outcomes.
Atmos Energy has an expected revenue and earnings growth rate of 11.1% and 6.7%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. ATO has a beta of 0.61 and a current dividend yield of 2.53%.
PNM Resources Inc.’s PNM acquisitions, investment in utility infrastructure and development of cost-effective power generation units will assist it to provide reliable and affordable power. PNM aims to have an emission-free generating portfolio by 2040. Higher regional demand is increasing market prices and expanding PNM’s transmission margins. Our model predicts PNM’s total revenues to increase during 2023-2025.
PNM Resources has an expected revenue and earnings growth rate of 17.2% and 1.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 30 days. PNM has a beta of 0.41 and a current dividend yield of 3.34%.
The York Water Co. YORW impounds, purifies and distributes water. YORW is regulated by the Pennsylvania Public Utility Commission in the areas of billing, payment procedures, dispute processing, terminations, service territory, and rate setting. YORW must obtain PPUC approval before changing any of the aforementioned procedures.
The York Water Co. has an expected revenue and earnings growth rate of 16.6% and 9.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the last 30 days. YORW has a beta of 0.54 and a current dividend yield of 2%.
The York Water Company (YORW): Free Stock Analysis Report
This article originally appeared on Zacks
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