The current macro environment is challenging for stock market investors. The ongoing war in Ukraine, supply chain disruptions in China and rising interest rates have clouded the picture for the U.S. and global economy. The S&P 500 is currently down 19% year-to-date as a result. In an environment like this, many investors are looking for stocks that are crisis-proven and have a high likelihood of maintaining their dividends, no matter what.
Electric utilities can be a good industry to look for such stocks, as electricity demand, at least by consumers, is not very cyclical, and generally holds up well even during major economic downturns. Customers still use electricity for heating and cooling their homes, for cooking, and so on, regardless of economic conditions.
In this report, we’ll showcase three electric utilities that have not only resilient business models but have also proven that their dividends are safe during severe recessions.
Consolidated Edison (ED)
Consolidated Edison (NYSE:ED) is a major electric utility in the United States. With a market capitalization of $34 billion, it belongs to the larger players in its industry. Most of its customers are located in New York City and the surrounding areas.
Consolidated Edison has a very solid track record when it comes to being resilient versus downturns, although its growth rate has not been especially high in the past. Over the last decade, its earnings per share grew at a low-single-digit rate, but the largest drawdown was in the single digits only.
This resilience has allowed Consolidated Edison to be very consistent with its dividend payments. In fact, the company has increased its dividend an outstanding 48 years in a row, making it a Dividend Aristocrat and a soon-to-be Dividend King.
The company continued to increase its dividend during all types of macro environments, which includes the pandemic, the Great Recession, the bursting of the dot-com bubble and so on. We thus feel confident that Consolidated Edison would also keep its dividend growth track record in place if the U.S. experiences a major economic downturn next year.
Based on EPS expectations for the current year, Consolidated Edison will pay out 70% of its profits this year. It would take a large earnings pullback for its payout ratio to rise to 100%, and even if that were to happen, Consolidated Edison could keep its dividend in place until profits rise back to the current level.
Not a lot of earnings growth can be expected from Consolidated Edison, but the dividend, which yields 3.3%, is secure and will most likely continue to grow over time.
Southern Company (SO)
Southern Company (NYSE:SO) is an electric utility that is focused on markets such as Georgia, Tennessee and so on, where it sells electricity and natural gas to around nine million customers. With a market capitalization of $75 billion, Southern Company is the third-largest player in its industry in the United States.
Like Consolidated Edison, it operates with a resilient, non-cyclical business model. In fact, its earnings growth track record is even better than that of its New York-based peer, as Consolidated Edison managed to grow its EPS during every single year of the last decade, except for 2016, when it pulled back by 0.3%.
This excellent consistency has allowed Southern Company to reward shareholders with growing dividends over time. The company has increased its dividend for 21 years in a row. That does not yet make Southern Company a Dividend Aristocrat, but the company nevertheless has proven its ability to increase shareholder returns during tough times, including during the pandemic and the Great Recession.
Southern Company currently trades with a dividend yield of 4%, which is more than twice the broad market’s dividend yield. Based on expected EPS for the current year, Southern Company’s dividend payout ratio is 75%, which is not low but very reasonable for a company with resilient profits.
Investors should not expect too much EPS growth from Southern Company going forward, but a 4%-5% annual growth rate seems achievable, considering the company’s past performance. In addition with a safe dividend yield of 4%, that makes Southern Company look attractive.
Evergy (NYSE:EVRG) is an electric utility as well, although a much smaller one compared to Consolidated Edison and Southern Company. The company trades with a market capitalization of $14 billion today. Evergy is active in Kansas and Missouri, where it serves around 1.5 million residential customers and 200,000 commercial customers.
Its business is seasonal, as electricity demand is higher during the summer months due to customers using more electricity for heating during those months. The third quarter thus usually is Evergy’s strongest quarter by far. On a year-to-year basis, this does not impact results, however, and Evergy has proven to be resilient when we look at its annual profits.
Over the last decade, there were some years where earnings pulled back by a little more than 10%, such as in 2015. But overall, that still makes for a pretty low-risk business model. Its somewhat more elevated EPS pullback risk, relative to ED and SO, is balanced out by a stronger earnings growth rate, as Evergy has grown its EPS at the highest rate among these three companies, looking back over the last decade.
At current prices, Evergy offers a dividend yield of 3.9%, which is quite attractive. The dividend payout ratio is a little below 70% today, which is very reasonable. Evergy has an 18-year dividend growth track record, which is not quite as pronounced compared to Southern Company and Consolidated Edison, but which still easily covers past downturns such as the Great Recession.
Evergy is slightly more cyclical compared to its larger peers, but its dividend is still safe and reliable. The above-average growth rate could be attractive for investors as well, as it has a positive impact on Evergy’s total return potential over the coming years, relative to a slower-growing electric utility such as Consolidated Edison.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.