Xcel Energy’s dividend outlook
Xcel Energy’s (XEL) per share earnings are expected to rise 4.0%–6.0% annually for the next few years. Its $18.4 billion capital investment plan is forecast to enhance its rate base by 5.5% compounded annually through 2021.
Xcel Energy’s actions to reduce regulatory lags by filing multiyear rate cases might improve its return on equity, which ultimately bodes well for long-term earnings growth. With a stable earnings outlook, investors may see Xcel Energy’s targeted dividend growth of 5.0%–7.0% as reasonable.
We can see in the above graph how Xcel Energy stock performed against the broader markets (SPX-INDEX) (SPY) and its utility peers. In the last five years, Xcel Energy’s returns, including dividends, were 15.0% compounded annually. In the same period, the Utilities Select Sector SPDR ETF (XLU) returned 13.0%, while the broader markets returned 14.0% compounded annually.
Fed’s rate hike
Treasury yields are falling lately as the possibility of another interest rate hike this year has been decreasing. According to CME Group, there’s currently a ~30.0% chance of a rate hike in December 2017 compared to a nearly 50.0% chance in July 2017.
Higher interest rates are generally considered detrimental to utilities because higher debt servicing costs dent their profitability. In terms of dividend yields, utility stocks can become less appealing.
The US utility sector (XLU), which is usually considered a slow-moving industry, has overtaken the broader markets by a fair margin so far this year. To know where they are heading from here, read What XLU Utility Chart Indicators Suggest in Early September.