Bear market fears continue to dominate the headlines this year. Oil and China are crashing and western markets are being sold in anticipation of another global sell off. Investors are checking their statements in anguish, as they are now faced with a decision to sell everything, or hide in areas that are less likely to be affected. Rather than panic and hit the sell button, investors need to be aware of options that will defend their portfolio against more selling.
In a recession, people still have to stay warm and keep the lights on. The consistency of revenues based on those human needs, as opposed to wants, makes the sector favorable in down times.
Gas, water and other necessary utilities companies are all considered to be recession proof industries. These companies can benefit from slowing economic growth, as interest rates will have a tendency to stay lower. Low rates help a utility company by making their dividend look more attractive, plus it allows for cheaper borrowing.
The Fed has hinted that rates will be rising, making the dividend of utilities less desirable. However, if global market pressure continues, the Fed will inevitably back off from that thought. The combination of low interest rates, high dividends and market fear make utilities a good place to hide.
Utilities Select Sector SPDR Fund (XLU) is an ETF that reflects the performance of utilities. The chart below marks the performance over the last two years versus the S&P. A closer look shows the divergence since 2016, with smart money supporting the sector.
While the ETF will reduce company specific risk, it also tends to reduce reward and dividends.
Let’s take a look at four top-ranked utility stocks to buy that will enhance the sector play.
Idacorp (IDA) is an electric public utility company and a Zacks Rank #2 (Buy). The company is engaged in the generation, purchase, transmission, distribution and sale of electric energy primarily in the areas including southern Idaho, eastern Oregon and northern Nevada. The company operates gas and coal fired plants, but the majority of its operations rely on hydroelectric power for its generating needs. The majority of its customers include lodges, condominiums, and ski lifts and related facilities.
Idacorp has a market cap of $3.4 billion with a dividend yield of 3.01%. The company EPS growth was up 11.45% over the previous quarter and has a good record of surprising EPS to the upside.
NorthWestern Corp (NWE) is a Zacks Rank #2 (Buy) and one of the largest providers of electricity and natural gas in the northwest quadrant of the United States. Founded in 1923, NorthWestern generates and distributes electricity and natural gas to over 700,000 customers in four states including Montana, South Dakota, Nebraska,
The company has a market cap of $2.6 billion and a 3.52% dividend yield. Its sports a Forward PE of 16 and has a Zacks Style Score of “B” in Growth, with EPS growth up 34% from the previous year. While EPS estimates have been coming down lately, sales growth has been steady, an important catalyst for the company.
Southern Energy (SO) is a Zacks Rank #2 (Buy) that operates as a public utility company, by means of coal, nuclear, oil, gas and hydro power. The company, with over 26,000 employees, provides a broad range of energy-related services to utilities and industrial companies globally. Southern Energy businesses include independent power projects, integrated utilities, a distribution company, and energy trading and marketing businesses outside the southeastern United States.
Southern has a market cap of $43 billion and offers investors a dividend yield of 4.6%. EPS growth was up 7.34% from last year, showing why the company has a Zacks Style Score of “B” in Growth and Momentum. The company has had an upside surprise six of the last eight times.
SCANA Corporation (SCG) is a Zacks Rank #2 (Buy) that is an energy-based holding company whose businesses include regulated electric and natural gas utility operations, telecommunications and other non-regulated energy-related businesses. SCANA’s subsidiaries serve electric customers in South Carolina, North Carolina and Georgia.
SCANA offers investors a 3.57% dividend yield, with an $8.55 billion market cap. Estimates for the company have risen 1.5% over the last 90 days, going from $3.89 to $3.95 a share.
Utility Stocks to Buy In Summary
Utilities won’t hit home run, but while the pitcher is throwing a no-hitter, they offer a chance for investors to bunt their way on base. If you are fearful of more market downside, park yourself in utilities until the risks fade away. If interest rates start to rise, or when the fear of global recession is no longer present, exit the sector and add risk.
Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report