Unswerving demand for basic utility services like electricity, gas and water explains the utility sector’s perpetual fundamental strength. While utilities are cash generators, funds generated from internal sources are insufficient to carry out long-term projects given their capital intensive nature. So, utilities need to approach the capital market for funds.
The Mar 2017 interest rate hike (after Dec 2016) is likely to increase the cost of capital, making operations costlier. This might impact the utilities’ ability to pay uninterrupted dividends.
The Federal Reserve, with an objective to normalize interest rates, has hinted at two more rate hikes in 2017. The hike in interest rates will constrict utility companies’ ability to pay regular dividends and might even result in migration of investors from the utility space to bonds for higher returns.
As per the U.S. Energy Information Administration (EIA), total U.S. electricity generation from utility-scale plants is expected to decline 0.7% per day in 2017 from 11,140 gigawatt hours per day in 2016 on account of lower demand. The drop in electricity generation will more than offset the expected rise in electricity prices in 2017 and will mar the prospects of utilities as well.
President Trump has taken steps to repeal the Clean Power Plan, which has impacted utilities. However, amendment of the Clean Power Plan and other regulations will likely take years to get implemented. The President’s decision can also face legal challenges from environmental groups and could force utilities to carry on with large investments to meet emission standards.
The utility sector recorded earnings growth of 10.7% on the back of revenue growth of 9.1% in the fourth quarter of 2016. However, this sector is expected to see a 1.7% decline in earnings in the first quarter of 2017, as per our weekly Earnings Preview report.
Our Criteria for Utility Sector Selection
Here, we rely on our proprietary Zack Rank and Style Score systems to help you avoid a few utilities this earnings season. Our research shows that stocks with a Zacks Rank of #4 (Sell) or 5 (Strong Sell) along with a VGM score of ‘D’ or lower are best avoided…