Utility Sector Ideas

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>>> Buy Utility Stocks Now, Goldman Sachs Says. They Could Be a Great Source of Dividends.


Barron's

By Lawrence C. Strauss

Updated Aug. 14, 2020


https://www.barrons.com/articles/unility-stocks-interest-rates-spread-income-investing-dividends-51597350732?siteid=yhoof2&yptr=yahoo


Energy is the worst-performing S&P 500 sector in 2020.

Utility stocks continue to lag behind the broader market, even though their earnings have been pretty durable.

For income investors, that is a double-edged sword. With bond yields so low, utilities stocks have been popular for income investors for a long time. Now, the spread between the sector’s yield and that of the 10-Year U.S. Treasury note is near a 25-year high, according to Goldman Sachs—3.2% versus 0.6% recently.

But the higher yields, which are attractive to income investors, also signify poor stock performance. The utility stocks in the S&P 500 have returned minus 6% this year, one of the more disappointing sector results. The S&P 500 has returned about 6% year to date.

Energy is the worst-performing S&P 500 sector in 2020, down about 37%, and financials have dropped about 18%. Utilities, meanwhile, underperformed earlier this year when the market sold off because of the pandemic, and have trailed behind during the subsequent rebound as well.

One potential silver lining: A Goldman Sachs research note points out that a yield spread this wide is generally followed by outperformance for utility stocks.

“Among defensive sectors, we recommend investors overweight Utilities given its high dividend yield and compelling valuation relative to interest rates,” according to the note. It said the sector’s 2021 earnings per share estimates have declined by 1%, the smallest cut among the S&P 500 sectors.

One thing to keep in mind is that utility-stock valuations remain pretty full. The Utilities Select Sector SPDR Fund (ticker: XLU) recently fetched about 19.5 times current-year earnings estimates, above its five-year average of about 18 times, according to FactSet.

“We have been negative on utilities for some time based on valuation,” said David Katz, chief investment officer at Matrix Asset Advisors in White Plains, N.Y. More recently, though, he has been warming to the sector. Katz said he recently started positions in Duke Energy (DUK) and Consolidated Edison (ED), among others.

Duke Energy has returned minus 6% this year. It yields 4.7%. Consolidated Edison, which yields 4.2%, has returned about minus 17% in 2020.

One utility that has bucked the underperformance trend is NextEra Energy (NEE), which has returned some 19% this year. It yields 2%. The company’s holdings include Florida Power & Light, a regulated utility, as well as wind- and solar-power assets.

The Utilities Select Sector SPDR Fund is down about 4% this year, including dividends.

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