Roger S. Conrad

Focus on quality. Invest incrementally, and keep a generous pile of cash to scoop up bargains when prices become too low to resist. That’s been our basic strategy in 2023, in anticipation of worse to come for the economy and markets. And tough times are exactly what we’ve seen over the past month. Since September 15, the Dow Jones Utility Average has lost more than -10 percent, taking its year to date loss to -14.6 percent including dividends.

As always happens in major downturns, some of the biggest losses are in places where we least expected them. A good example is NextEra Energy (NYSE: NEE). America’s leading producer of solar, wind and energy storage reduced dividend growth guidance at its affiliate NextEra Energy Partners (NYSE: NEP). And the result was several days of the worst selling for utilities since March 2020.

Aggressive Holding AES Corp’s (NYSE: AES) dividend yield is higher than its P/E multiple. That’s after a -54 percent year-to-date decline in the stock, most of it coming the last couple months as renewable energy and dividend stocks skidded across the board.

Earlier this month, Duke Energy (NYSE: DUK0 closed the sale of its commercial distributed generation unit to a private capital consortium for $364 million. And later this year, it will complete the sale of its utility scale renewable energy unit to Brookfield Renewable Partners (NYSE: BEP, BEPC) for $2.8 billion.

Let’s not sugarcoat it: Utility stocks are having one of their worst years in quite a while. And the going has been even worse for a whole host of companies in the Utility Report Card coverage universe, especially renewable energy stocks and almost all small-to-mid-sized communications companies. The damage is there to see in this issue’s URC comments, which highlight total returns for the first nine months of 2023.

Normally, when a stock drops nearly 60 percent in just three weeks to yield more than 15 percent, you can bet a dividend cut is on the way. These, however, are no ordinary times in utility world. And a lower payout is far from a foregone conclusion for NextEra Energy Partners (NYSE: NEP). In late September, parent NextEra Energy (NYSE: NEE) cancelled a planned asset sale or “drop down” to Partners, citing tough capital market conditions that didn’t make sense to ignore. To make up for the lost proceeds, it instead announced the $923.4 million sale of its non-core Florida natural gas utility unit to Chesapeake Utilities (NYSE: CPK). And to compensate for the lost revenue to Partners, it cut the affiliate’s projected dividend growth rate to 6 percent from the previous 12 percent.

For the 10^th time in the post-World War II period, the S&P Utilities Index has dropped by more than -20 percent from its previous all-time high—reached in September 2022. Last month’s feature article highlighted key headwinds facing utilities and essential service stocks this year—and reasons why I didn’t think we’d seen the worst of this now more than year-old downturn.