Utilities Select Sector SPDR® ETF

Valuations are at the higher end of their historical range. Investors should avoid defensive sectors, which are highly sensitive to interest rate changes.

According to Wall Street analysts, Southern Company (SO) has a price target of $51.22 compared with its current market price of $51.53. This implies an estimated downside of 0.6%.

US utilities (XLU) are targeting average annual earnings growth of 4%–6% for the next few years.

Southern Company’s management has given an EPS guidance of $1.05 for the third quarter.

Exelon Corporation (EXC) reported a net income of $440 million in its 2Q14 earnings. The quarterly net income was $14 million lower year-over-year (or YoY).

Dominion Resources (D) depends upon both internal and external sources of financing for its capital expenses and dividend payments.

In the past couple of months, institutions have increased their positions in Exelon by nearly 2%, from 85.6% to 87.2%, as of October 3, 2016.

Utility sector valuation appears stretched. 2014 was a great year for utilities, which gained 26.62% ex-dividends and were the best-performing sector.

PPL’s (PPL) management expects fair annual earnings growth of 5%-6% through 2020, which will likely facilitate its dividend growth.

The utility sector, among the most vulnerable to interest rate hikes, seems strong despite the rate hike in mid-June.

American Electric Power (AEP) has an attractive debt profile, with the company’s debt making up just 7% of its consolidated debt.

The ADP National Employment Report for September 2017 showed some weaker improvement in private sector employment to 135,000 in September compared to the market’s expectation of 125,000.

US utilities have been one of the main beneficiaries of the near-zero interest rate environment for the past ten years.

The expected rise in US interest rates later this year may dent the profitability of utilities, given their higher outflows toward debt servicing.

Dominion Energy (D), the third-largest utility, declared a per share dividend of $0.84 per share for 1Q18 last month.

New power generation capacity additions in 2015 were mainly contributed by wind, natural gas, and solar. This trend is expected to persist in 2016 as well.

For the last 12 months, Southern Company’s (SO) payout ratio was ~76%, while Duke Energy’s (DUK) ratio was close to 97%.

Xcel Energy’s (XEL) capital spending plan and actions to reduce regulatory lags could improve its earnings growth significantly during the next few years.

Sempra Energy paid annual dividends totaling $3.02 per share in 2016, while EIX and PCG paid per-share dividends of $1.98 and $1.93, respectively, in 2016.

Renewables giant NextEra Energy (NEE) has once again shown its mettle, continuing its strong quarterly earnings streak.

BHE’s earnings before taxes rose to $666 million in 2Q16, as compared to $649 million during the same quarter last year.

The Utilities Select Sector SPDR ETF (XLU), which tracks the performance of the utility sector, rose 2.7% in November 2017.

NextEra Energy (NEE) is estimated to report earnings of $1.53 per share for 1Q17. It reported earnings of $1.55 per share in 1Q16.

NextEra Energy (NEE) leads the pack with total returns of 21% in the past year. NextEra Energy increased its dividend per share 13%.

Southern Company reported adjusted earnings of $0.88 per share for 1Q18 and exceeded the consensus estimates.

Though electric sales have shown flattish growth in the last few years, US utilities have managed to distribute stable or increasing dividends.

Southern Company (SO) stock has continued to show weakness recently amid increasing uncertainty regarding the fate of Plant Vogtle.

Duke Energy stock is currently trading at an EV-to-EBITDA valuation multiple of 12.5x against its five-year historical average of 11.0x.

Dominion Energy’s (D) five-year average valuation multiple is around 14x, while the industry average is near 10x.

According to Wall Street analysts, the top constituent of the S&P 500 Utilities Index, NextEra Energy (NEE), has a price target of $149.08 against its current market price of $141.07.

Duke Energy rallied 9% in 2016, roughly tracking the Utilities Select Sector SPDR. Dominion Resources rose 12% in 2016, while Peer NextEra Energy rose 15%.

The change of 94 Bcf in the underground natural gas inventory during the week of August 28 came in higher than Wall Street analysts’ expectation of 84 Bcf.

Short interest in FirstEnergy rose more than 17% on March 15, 2017. Total shorted shares in the company were 8.7 million on February 28, 2017.

Currently, utilities are trading at a PE (price-to-earnings) multiple of 13x—compared to their historical average valuation of ~14x–15x.

According to analysts’ consensus, PPL (PPL) stock offers a handsome potential upside of ~22% in a year with a mean target price of $33.5.

Utilities have been weak compared to the broader markets this year largely due to the strength in the Treasury yields.

Southern Company (SO), one of the largest regulated utilities, finished 2016 on a decent note.

Currently, NRG Energy (NRG) stock is trading at a forward PE ratio of 8.5x based on its estimated EPS in 2019.

Dominion Energy (D) has a target price of $79.31—compared to its current market price of $77.86, which implies an estimated gain of 2%.

Currently, the S&P 500 is giving year-to-date (or YTD) returns of more than 8%. It posted gains for seven consecutive quarters. The S&P 500 Index (SPY) closed at a new high 34 times in 2014.

Of the 22 analysts tracking Dominion Resources on February 23, 2017, four recommended it as a “strong buy,” while four recommended it as a “buy.”

At 4.8%, Southern Company is currently the highest-yielding utility among the top utilities in the sector.

Dominion Energy (D) announced its agreement to buy SCANA (SCG) on January 3, 2017. The deal is expected to accelerate Dominion Energy’s earnings growth.

NextEra Energy (NEE) will likely report its second-quarter earnings on July 24. The utility is expected to report an EPS of $2.28 for the quarter ended June 30.

Duke Energy Corporation (DUK) is a heavyweight in the U.S. electric utilities industry. It mainly operates in the U.S. and Latin America. In 2013, its operations had $24.6 billion in revenue.

What makes the utilities unattractive is the fact that interest rates will likely be rising soon. The utilities require a huge amount of infrastructure.

According to Wall Street analysts, NRG Energy’s (NRG) price target for the next year is $20.36. That implies an estimated rise of nearly 12.0%.

American Electric Power (AEP), one of the largest utilities in the country, has declared a dividend of $0.59 per share for the third quarter of 2017.

Currently, NRG Energy (NRG) is trading at an EV-to-EBITDA valuation of ~12x—compared to its five-year historical average valuation of 11x.

NRG Energy (NRG), the leading merchant power player stock and one of the smallest components of the S&P 500 Utilities Index (XLU), has a mean price target of $36.50 against its current market price of $31.20.

NextEra Energy (NEE) paid dividends of $3.48 per share in 2016. In 2017, it’s expected to pay dividends of $3.93 per share.

US water utilities saw a big stock rally 1H16, rising more sharply than electric utilities. But they’ve lost most of those gains so far in 2H16.

Duke Energy reported total revenues of $6.5 billion in 3Q17 against its revenues of $6.8 billion in the corresponding quarter last year.

NRG Energy (NRG) stock seems to be trading at a fair valuation compared to the industry average and its historical average.

Although utilities’ total returns were dominated mostly by stock appreciation this year, stable and increasing dividends were also an important factor.

Utilities witnessed an even harsher fall amid broader markets’ sell-off. However, utilities outperformed the S&P 500 in 2018.

Among the ten analysts tracking NRG Energy, four recommended a “strong buy,” five recommended a “buy,” and one recommended a “hold.”

The Vanguard Group added net 0.46 million shares of Public Service Enterprise Group (PEG) in 4Q17.

Broader utilities (XLU) have witnessed notable weakness recently mainly due to the strength in Treasury yields.

Of the 18 analysts tracking FirstEnergy (FE), eight recommend “buy,” six recommend “hold,” and four recommend “strong buy.”

Southern Company stock underperformed utilities at large and the broader markets in the last five years. Southern Company stock rose 1% in the past year.

NextEra Energy (NEE) beat its peers in terms of returns in the last few years. NextEra Energy returned 14% in 2018.

There was a tsunami in NRG Energy (NRG) shares on July 12, 2017. NRG Energy stock opened 19% up and maintained the uptrend throughout the day.

Wall Street analysts still seem positive about NextEra Energy (NEE), particularly because it’s risen so much compared to last year’s levels, resulting in its premium valuation.

Industrials, utilities, and telecommunications have much higher leverage, as these sectors have massive capital needs.

US utility stocks slipped 0.8% on May 15 after ten-year Treasury yields peaked at 3.1%—a seven-year high. Broader markets also corrected 0.7%.

Of the 41 utilities stocks we track, 30 gained during the week ended July 17. A positive Greek deal cheered markets globally, and dovish comments by the Fed pushed mid-to-long-term bond yields down.

The consensus analyst price target for Southern Company (SO) is $50.76. Its current market price is $49.78, implying a rise of 2% over the next year.

In the last year, American Electric Power returned 21%—compared to broader utilities’ average returns of ~11%. During the same period, SPY returned 22%.

Utility ETFs have performed well in the last one year. The Vanguard Utilities Fund ETF (VPU) has been no exception to this.

Duke Energy (DUK) has corrected more than 12% since July 2016. The Utilities Select Sector SPDR (XLU) has also witnessed similar weakness during this period.

Dimensional Fund Advisors’ top buys are Apple (AAPL), AT&T (T), Microsoft (MSFT), L3Harris Technologies (LHX), and Verizon Communications (VZ).

NextEra Energy (NEE) has one of the cleanest generation mixes among peers.

NextEra Energy’s (NEE) utility and non-utility segments have flourished in the past couple of years.

Among the total eight analysts covering NRG Energy (NRG), three recommend the stock as a “strong buy,” four recommend it as a “buy,” and one recommends it as a “hold.”

On average, utilities increased their dividend per share ~4% compounded annually in the last five years.

Dominion Energy (D) stock currently looks attractively valued. It’s trading at a forward PE of 17.5x against its five-year historical average PE of 24x.

In this series, we’re analyzing analysts’ favorite stocks from the S&P 500 Utilities Index (XLU). We’ll look at Exelon (EXC) in this part.

NRG Energy (NRG) stock was trading at an EV-to-EBITDA valuation of 13x—higher than its five-year historical valuation.

So far, US utilities have had a decent run this year. The Utilities Select Sector SPDR ETF (XLU) has risen more than 14%.

US utilities (XLU) plan to increase their per share dividends 4.0%–6.0% annually going forward. That’s in line with their target earnings growth for the next few years.

Dividend stocks have underperformed this year so far. The dividend yield measures dividends payed by a company in the last 12 months relative to its share price.

Exelon (EXC) is currently trading at a 4% and 13% premium to its 50-day and 200-day moving averages, respectively. The strong premium indicates the strength of Exelon stock.

The California Department of Forestry and Fire Protection (or Cal Fire) has blamed PG&E (PCG) for causing the most devastating wildfire in state history last year.

US utilities continue to trade higher as they approach a second and highly probable 2017 interest rate hike next week.

The power sector is the backbone of any economy. All of the other industries depend on it. In the U.S., the power utilities business is characterized by steady dividends and stable earnings.

Duke Energy forecasts its earnings to grow annually by 4%–6% in the long term. It has given an earnings guidance range of $4.50–$4.70 per share for 2016.

During 3Q17, there was lots of action for institutional investors in the Utilities Select Sector SPDR ETF (XLU).

The US electric utility industry is mostly regulated. The Public Utilities Regulatory Policies Act (or PURPA) was passed in 1978, beginning the deregulation of the utility industry.

The Utilities Select Sector SPDR ETF (XLU), which represents the S&P 500 Utilities Index, currently yields 3.5%. In this series, we’ll discuss the top ten highest-yielding utility stocks from the S&P 500 Utilities Index.

Hybrid utility FirstEnergy (FE) is presently trading at one of the highest dividend yields of 4.9%.

Currently, Dominion Energy stock is trading at an EV-to-EBITDA valuation multiple of 14.5x, while utilities at large have a valuation multiple near 10.0x.

The ten-year Treasury yield fell from a high of 2.28% to 2.16% in August 2017.

According to Southern Company’s SEC filing on March 16, 2017, it doesn’t expect the Kemper County power plant to be operational by mid-March.

Dominion Energy (D) and NextEra Energy’s (NEE) stronger earnings growth potential could facilitate their dividend growth.

In a letter to shareholders, BlueMountain said that it plans to launch a “slate board” by February 21 to replace PG&E’s existing board.

Georgia-based Southern Company (SO) declared a dividend of $0.58 per share on July 18, 2017. Its ex-dividend date is August 17, 2017.

Southern Company (SO), the fourth-biggest utility by market capitalization, released its third-quarter earnings on November 7.

Including dividends, NextEra Energy has returned almost 10% in 2018. The total returns from utilities (XLU) at large were ~3% during the same period.

Xcel Energy’s (XEL) per share earnings are expected to rise 4.0%–6.0% annually for the next few years.