How US Utilities Performed Last Quarter
US utilities in 1Q17
The first quarter of 2017 was relatively lively for utility investors as it was marked with several interesting events. One of the most important events, of course, was the quarter-percent interest rate hike, to which utility stocks seemed largely indifferent.
In the past three months, utility stocks (XLU) have rallied nearly 6%—marginally ahead of broader markets (SPY) (SPX-INDEX). However, from mid-2016, utility stocks have been mostly flat, which has some investors concerned.
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We should note that the gap between US utilities’ dividend yield of 3.5% and that of Treasuries is also getting squeezed, now that US interest rates are gradually normalizing. In mid-2016, this gap was nearly 200 basis points, as compared to the yield of 1.5% for 10-year Treasuries. However, after the rate hike in March 2017, this gap shrank to just over 100 basis points as Treasuries yields have risen to 2.4%.
Utilities in focus
From a broader perspective, large-cap US utilities (NEE) (DUK) (SO) seem to be drawing more investment propositions. Their expected fair earnings growth makes them well-placed for attractive dividend growth ahead. Given the doubts surfacing about how well President Trump can execute his promises of deregulation, tax reform, and higher spending, investors might once again choose utility stocks to de-risk their portfolios.
Meanwhile, Trump recently signed an executive order to repeal Obama-led climate change policies. The executive order also asks the EPA (US Environmental Protection Agency) to review the US Clean Power Plan. Given the probable withdrawal of Obama’s climate policies, we’ll likely hear a sigh of relief from utilities that have coal-dominated (KOL) generation mixes because these companies won’t have to alter their generation mixes within their previous deadlines.
Keep reading this series (below) for a closer look at utilities’ returns, valuations, interest rates, implied volatility, and price targets.