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Utilities DUK, XLU Brace for Volatility as Rate Hike Nears

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Market performance

US utilities traded mostly downward after the 2016 US Presidential election results. However, broader markets were seen gaining momentum in the same period. Duke Energy (DUK), the largest US utility by market capitalization, lost almost 6% after November 8, 2016. Treasury yields shot up after Donald Trump’s victory, which largely weighed on utility stocks.

The Fed’s upcoming meeting in December could be an important cue for markets as well—particularly for utilities. The probability of a prospective rate hike in this meeting recently peaked at 95%. It will be interesting to see how utility stocks react if the rate hike, in fact, takes place.

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A worthy addition to a utility portfolio?

The chart above shows the one-year stock price movement of Duke Energy in comparison with Utilities Select Sector SPDR (XLU) (SPY) companies. Interestingly, US utilities rallied more than 20% in 1H16 on a slower-than-expected pace of interest rate hike from the Fed. And Duke Energy’s investors might be more worried than most about the rate hike because Duke is one of the most leveraged stocks in the sector. Its valuation may also be a concern.

Other concerning questions abound surrounding the company. While Duke is one of the highest-yielding utilities, can it continue to outperform in the future? How is its earnings growth looking? Will its earnings growth be reflected in its dividend distribution? How concerning is its leverage?

In this series, we’ll answer these questions by analyzing the company’s financial and operational performances. We’ll also focus on historical dividend trends and analysts’ expectations.

We’ll start with the total returns of major US utilities.

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