Geopolitical tensions and falling Treasury yields have been hinting at an upcoming recession recently. The defensive—utilities sector has outperformed broader markets so far this year. Utilities are one of the immune sectors from the trade war as they generate almost all the revenues from the domestic operations. Also, little or no correlation with the economic cycles makes this industry an attractive bet among these uncertain times. The Utilities Select Sector SPDR ETF (XLU) has rallied more than 17% while the S&P 500 is up about 13% YTD (year-to-date).
Almost all the utility stocks have had a splendid run so far this year. Their potential upside seems capped based on analyst estimates mainly due to their recent strength. However, investors might continue to turn to safer utility stocks due to stable stock movements and relatively higher dividend-paying capabilities. Also, expected rate cuts that help boost the economy could open a new upside for these top utility stocks.
Southern Company stock strong, but analysts are wary
Southern Company (SO) stock is one of the most rallied stocks among the industry. The company is currently trading close to its all-time high. However, at the moment, Wall Street analysts are looking with caution at Southern Company. The company has a mean price target of $56.5, indicating a potential downside of more than 2%. It is currently trading at $57.6.
SunTrust Robinson Humphrey (STI) raised Southern Company’s price target from $57.0 to $58.0 on August 15. The top regulated utility plans to sell 30.0 million equity units at a price of $50.0 to raise $1.5 billion. It will use the proceedings as short-term debt and for general corporate purposes.
Utility company NextEra Energy shows strong growth
The largest utility stock by market cap NextEra Energy (NEE) has rallied more than 25% so far this year. Analysts seem positive on NextEra Energy stock based on their “buy” ratings compared to peer utility stocks. They have given it a target price of $222.2 against its current market price of $217.1. This indicates a potential upside of just 2.3% for the next twelve months.
Morgan Stanley (MS) increased NextEra Energy’s price target from $207.0 to $234.0 on August 14. Renewables titan NextEra Energy continued its strong earnings growth in Q2 of fiscal 2019. The utility has been generating superior earnings growth for several quarters.
Duke underperforms while Dominion sees an upside
Duke Energy Corporation (DUK) has a mean target price of $94.3, implying an estimated upside of 5.7%. It closed at $89.3 on August 15. The second-largest utility by market cap, Duke Energy has significantly underperformed peers this year. It is up only 3% so far this year compared to broader utilities’ 17%. Duke Energy reported earnings of $1.12 per share in Q2 of fiscal 2019, beating consensus estimates. The company’s EPS grew 20% year-over-year.
Dominion Energy (D) stock offers an estimated upside of 4.6% against its current market price of $77.0. Wall Street analysts have given it a price target of $80.6 for the next twelve months. Southern Company, NextEra Energy, Duke Energy, and Dominion Energy collectively form approximately 35% of shares in Utilities ETF (XLU).
What’s next for these utility companies?
Unfortunately, the Utilities ETF (XLU), the representative of ‘widow-and-orphan’ utility stocks, returned (including dividends) 11.5% compounded annually in the last five years. The broad market index S&P 500 returned 10% in the same period.
Utilities at large appear to be trading premium valuation compared to their historical trends. However, impending rate cuts, dividend profiles, and increasing broader market uncertainties could boost these defensives in the near future.
Read These Utilities Have Increased Dividends for 45+ Years. You can also read about Southern Company’s chart indicators and valuation in Southern Company Stock Looks Strong after Q2 Earnings.