Historically, utility stocks are known to generate stable earnings, given they produce commodities like electricity, gas and water. The security of these utility stocks is especially valuable in today’s volatile economy.
Sang Baum Kang, Ph.D & FRM, associate professor of Finance at the Stuart School of Business at Illinois Institute of Technology, discussed some of what sets utility stocks apart in an email to InvestorPlace. He listed the following three reasons why they can be more docile than the broader market:
- “Many utilities are regulated. They have a limited power to change their product price. In many other industries, firms have more freedom to set up their own pricing policies.
- “Demand elasticity to macroeconomic activities is small. Even though macroeconomic activities are high (low), the demand for a utility’s product may not be high (low). The correlation may be low.
- “Utilities cannot act as a pure profit maximizer. Many utilities should spend their time, money, and resources for public good, if natural disaster happens. For example, if it snows a lot and electricity distribution does not work, an electric utility should restore the electric power.”
Some of the top utility stocks provide investors with the perfect mix of high returns and low risk.
However, despite its “safe-bet” allure, not all utility stocks generated high returns this year.
In fact, some companies in the S&P 500 underperformed after the novel coronavirus pandemic created a mass sell-off. But as the market regains its footing, some utility stocks are back in the spotlight for high yields and safe payouts.
Given the elusive nature of today’s stock market, here are three utility stocks to buy this fall:
Utility Stocks: American Water Works (AWK)
American Water Works is a highly regarded utility stock. The company’s growth potential and stability stems from its core business providing regulated water and wastewater service.
Thanks to this regulatory control, the company was seemingly unaffected by fluctuations in the market. Its earnings per share (EPS) improved during the pandemic. Yahoo reports that American Water Works beat estimates in the second quarter on all counts. The company posted revenue of $931 million, which beat estimates by 1.54%. And EPS also increased by 3.08%.
American Water Works’ resilience makes AWK stock a favorite among risk-averse investors. The utility sees a greater potential for growth and predicts EPS will rise 7% to 10% between 2020 and 2024.
American Water Works is confident in its ability to drive revenue in the coming years with a multibillion-dollar investment in its regulated water service. Given that water is an essential commodity, the potential for growth in this service will remain strong despite an uncertain economy. The company’s stellar Q2 earnings and competitive market position make AWK one of the best utility stocks to buy this fall.
If you are looking for a utility stock that’s both affordable and safe, Altagas should be your top pick. During a period of high uncertainty and turbulence, AGAAF braved the volatile market with ease. The stock is currently trending around $22 and provides a yield of about 5.44%.
Altagas’ ability to weather the Covid-19 storm is attributed to its utility service, which is one of its biggest revenue drivers. As an industry that is highly regulated, profits from this business unit remained relatively stable. This led many investors to buy the company’s stock for its safe returns.
But that’s not to say the utility stock was completely oblivious to the pandemic. In its most recent quarter, the company saw a dip in its net income at $21 million compared to $41 million in Q2 of 2019. However, CEO Randy Crawford believes this is not a cause for concern. With 85% of the business tied to the utility service, changes in the economic landscape are unlikely to affect Altagas long term. The company expects its rate base to grow 8% to 10% over the next few years.
Altagas’ low-risk business makes this a utility stock to buy in any investing environment. We would recommend picking up this safe stock while prices remain low.
Algonquin Power and Utilities (AQN)
Investors are on the lookout for stocks that provide an ounce of stability. While utility stocks are known for durability during challenging times, Algonquin Power and Utilities has become a safe bet.
In addition to its renewable energy business, the company also operates a utility service under its subsidiary Liberty Utilities. This subsidiary is backed by multi-million dollar contracts. More recently, the company acquired a water and sewer plant in Bolivar, Missouri for $23.5 million. Algonquin Power’s resilience and appetite for growth make it an appealing investment.
Like many of its utility peers, Algonquin ranks pretty high in terms of dividend yield. The company’s current yield amounts to 3.20% and a 10% dividend increase is expected. Algonquin has consistently increased its dividend over the last 10 years.
In an environment where furloughs and bankruptcies are commonplace, Algonquin Power and Utilities’ well-diversified business shows a lot of potential for long-term growth. This is the perfect utility stock for any valye investor to buy.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance.