Investors keep turning to defensives this year amid uncertainties in the broader markets. As a result, the utility sector has been one of the sweet spots among equities this year. So far, utilities have risen more than 20%—largely in line with the Dow Jones Index (DIA). However, some of the top utility stocks have outperformed their peers at large.
Utilities: Unusual rally in 2019
For instance, Southern Company (SO) stock has risen more than 42%, while NextEra Energy (NEE) has gained almost 38% YTD. Utility stocks are generally considered “widow-and-orphan” stocks due to their slow-moving and dividend-paying characteristics. However, their unusual run this year surprised investors.
Southern Company is the top-rallying utility stock, while NextEra Energy is second. Sempra Energy (SRE) is third with almost a 37% gain this year. American Water Works (AWK) is fourth with a rise of 36% during the same period.
What’s behind the rally this year?
Geopolitical tensions also increased uncertainties in the stock markets, which pushed investors towards these defensives. Also, utilities’ earnings are immune to business or economic cycles. Falling interest rates boosted utility stocks more this year. Apart from these macroeconomic factors coming into play, many specific developments also helped utility stocks.
Investors turned positive on Southern Company following favorable developments at its Plant Vogtle nuclear project this year. The plant’s cost overruns and delays have been a big concern for investors in the last few years. However, the company hasn’t increased its costs this year. Southern Company seems to be on track for its in-service deadlines.
However, Georgia regulators reported this week that the deadline looks challenging. The deadline might increase the project’s cost, which could cloud investors’ sentiment after such a steep rally. To learn more, read Southern Company: Clues Suggest an End to Its Rally.
NextEra Energy is the biggest utility with a market capitalization of $115 billion. The utility has been a consistent performer in the last few years. The company’s superior earnings and dividend growth make it stand tall among its peers. NextEra Energy’s matchless renewables portfolio and large regulated operations in Florida facilitate premium earnings growth. Interestingly, the company managed to increase dividends 11% compounded annually in the last five years. Meanwhile, utilities’ average was just 4%. It should be noted that dividend growth plays a vital role in driving shareholder returns in longer time periods.
American Water Works is the third top performer among utilities in 2019. New Jersey-based AWK is a water utility and operates in 47 states in the country. Its stable earnings in the last few years enabled stable dividends in this period. AWK increased its dividends by 10% compounded annually in the last five years and offers a yield of 1.7% at the moment.
Sempra Energy became the biggest utility by market capitalization in California after PG&E’s (PCG) debacle. The utility serves around 40 million customers globally. Sempra Energy also witnessed above-average earnings growth in the last few years.
Utility stocks’ long-term performance
These defensives outperformed broader markets as well this year. However, utility investors generally consider long-term horizons. Were these stocks equally good in the long term?
NextEra Energy topped the chart again. In the last five years, the utility returned 160% including dividends. At the same time, Southern Company returned 70% and mainly tracked utilities at large (XLU) and the S&P 500 (SPY). In comparison, American Water Works returned 155%, while Sempra Energy returned 52%.
Going forward, utility stocks’ movement from here looks capped given their inflated valuations. Also, the Fed’s indication of pausing rate cuts might hinder their growth. However, how the broader markets play out will largely drive these defensives in the short to medium term.
To learn about top utilities’ dividends, read Top Dividend Stocks from Utilities to Combat Recession.