Domestic-focused, capital-intensive companies in the Zacks Utilities sector are consistent performers and regularly reward their investors with dividends. The consistent dividend payment ability makes the utilities a bond substitute for the investors.
Utility operation is capital intensive, as consistent investment is required to upgrade, maintain and replace old pipelines and maintain and expand infrastructure to provide reliable services to an expanding customer base. The utilities raise their revenues from new electric, water and natural gas rates approved by the different commissions. Cost management and initiatives to increase efficiency in operation also allow the utilities to lower operational expenses. However, funds generated from these internal sources are not always enough to fund the big projects. Hence, utilities depend on the credit market for funds to carry on upgrades.
Utilities are traditionally averse to interest rate hikes. After a series of rate hikes, the Federal Reserve has finally lowered the benchmark rate, with three rate cuts lowering the existing rates by 100 basis points and bringing rates to a range of 4.25-4.50%. There is a possibility of more rate cuts next year. The reasons behind the rate cuts are to boost economic growth, the ultimate goal being price stability and maximizing employment.
As the interest rates are coming down, capital intensive utilities like PG&E Corporation PCG, Entergy Corporation ETR and New Jersey Resources Corporation NJR are good stock to add to your portfolio before the year end.
Utilities are always considered safe investment bets due to the nature of the services they provide to other industries. Life without water, electricity and natural gas is simply impossible in today day to day life. Utilities’ performance remains stable even during economic downturns as demand for these essentials hardly fluctuates.
The recent three interest rate cuts have been beneficial for the utilities, and more rate cuts are expected in 2025. The capital-intensive S&P 500 Utilities has returned 8.75% in the past six months compared with the S&P 500 group’s rally of 8.87%.
Per a projection from the U.S. Energy Information Administration, retail prices of electricity will continue to increase at all customer segments in 2025, boosting the utilities’ top-line growth.
In 2025, earnings from the Utilities sector are expected to improve 8.7% on 5.2% improvement in revenues. (For more details, refer to our weekly Earnings Trends)
We have used the Zacks Stocks Screener to shortlist three utilities with a Zacks Rank #2 (Buy) and a VGM Score of B. Stocks with a VGM Score of A or B and a Zacks Rank of 1 (Strong Buy) or 2 have better returns, on average. All these stocks are expected to continue their strong performance in next year.
All the companies have outperformed the Utilities sector in the past six months.
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PG&E Corporation is based in Oakland, CA. This public utility generates revenues mainly by selling and delivering electricity and natural gas to customers. Its long-term (three to five years) earnings growth is pegged at 9.61%. The company’s current dividend yield is 0.2%. For the 2024-2028 period, the company expects to invest $63 billion to strengthen and expand its infrastructure.
PG&E pulled off an average positive earnings surprise of 7.28% in the last four quarters. Its earnings estimates for 2025 have increased 1.4% in the last 60 days. The company currently has a Zacks Rank of 2 and a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Entergy Corporation is based in New Orleans, LA. The company primarily engaged in electric power production and retail distribution of power. Entergy’s disciplined investment in grid upgrades will give impetus to growth. The company plans to invest $19.76 billion during 2024-2026 to upgrade its distribution and transmission as well as support renewable expansion. The company’s current dividend yield is 3.19%.
Its long-term earnings growth is pegged at 9.61%. The company reported an average positive surprise of 5.61% in the last two reported quarters. Earnings estimates for Entergy for 2025 have increased 14.2% in the last 60 days. The stock currently has a Zacks Rank #2 and a VGM Score of B.
New Jersey Resources Corporation is based in Wall, NJ. The company distributes and stores natural gas. It continues to benefit from its investments in infrastructure, which help it serve its expanding customer base more efficiently. The company expects capital expenditures in the range of $495-$675 million for fiscal 2025. The company’s current dividend yield is 3.87%.
The company reported earnings on par with estimates in the last reported quarter. New Jersey Resources earnings estimates for fiscal 2025 and 2026 have increased 7.3% and 1.3%, respectively, in the last 60 days. The stock currently has a Zacks Rank #2 and a VGM Score of B.
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