Utilities so far this year
Investor unease, a slower-than-expected pace of interest rate hikes, and superior yield have pushed up US utility stocks so far this year. The Utilities Select Sector SPDR ETF (XLU) rose more than 13.0% and surpassed the broader markets by a wide margin. There are many attractive choices in the S&P 500 Utilities Index that have beaten broader utilities and the SPDR S&P 500 ETF (SPY) in this period. But which ones among them might keep doing that going forward?
In this series, we’ll look at one of the best and one of the worst stocks in the S&P 500 Utilities Index. One of them could create value for investors in the long term, while the other one might bore a hole in investors’ pockets.
Renewables leader NextEra Energy (NEE) stock doubled in the last five years, while XLU managed to rise nearly 50.0%. Florida-based NextEra Energy stock was driven by its better-than-expected earnings growth in the period.
We have considered earnings growth and stability, leverage, and dividend profile to assess the utility’s position. It stands fairly tall in these three aspects among its peers.
NextEra Energy, the largest component of the S&P 500 Utilities Index, has been an outperformer among broader utilities in the last five years. In that period, its returns, including dividends, came in at 20.0% compounded annually, while XLU and SPY returned 13.0% and 14.0% respectively, compounded annually, in the same period.
Utilities (VPU) are generally considered defensive stocks and are typically held for their stable dividends. NextEra Energy’s epic ascent, along with its superior dividend growth, contributed significantly to its total returns. Its dividend growth of nearly 10.0% in the last five years is the highest among its large-cap utility peers. For the next few years, it’s targeting a per share dividend growth of 13.0%, which is more than double the industry average.