Utilities outperform the S&P 500
The Utilities Select Sector SPDR ETF (XLU), which represents S&P 500 utilities, hit a 52-week high of $56.80 on December 4. Utilities are on a roll after broader markets were shaken by trade tensions over the last couple of months. Including dividends, broader utilities have returned ~10% this year, while the S&P 500 has returned 2%. In this series, we’ll discuss the ten largest utility stocks by market capitalization, comparing their performance, valuation, and target prices.
Many utilities posted notable earnings growth in Q3 2018, mainly driven by favorable weather. However, rising interest rates are a major concern for utilities. Although Fed chairman Jerome Powell has sounded dovish recently, the CME FedWatch Tool estimates a 73% possibility of a quarter-point rate increase at the Fed’s December meeting.
Higher interest rates are generally considered negative for utilities because they’re perceived as bond substitutes. Utility stocks (IDU) rallied after a rate hike in late September, but how they perform going forward remains to be seen.
The biggest utility by market capitalization, NextEra Energy (NEE), has continued its stellar performance this year, adding more than $14 billion to its market capitalization. At the same time, PG&E (PCG), one of the biggest utilities in California, lost more than $10 billion of its market capitalization after the stock tumbled due to the state’s November wildfires.