Roger S. Conrad

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.

With money market funds and CDs paying 5 percent plus, many investors are asking how dividend stocks can compete on yield.

The far more relevant question: How they stack up on total return, over a meaningful period of time. And on this score, cash alternatives don’t come close to matching up.

Not since 1999 have essential services sectors lagged market averages by this great a margin. Year to date, the Dow Jones Utility Average has dropped by nearly -10 percent. The S&P 500, in contrast, is ahead by 16 percent. And despite losing some momentum recently, the Nasdaq 100 is up better than 40 percent.

Adding water and wastewater customers by acquiring cash-poor systems on the cheap, then upgrading systems under reliable rate plans: That’s been the formula for Essential Utilities’ (NYSE: WTRG) reliable 7 to 10 percent annual earnings and dividend growth since the early 1990s, when it was known as Philadelphia Suburban.

In the short-term, the stock market is basically a popularity contest. Investors large and small chase the upside momentum of the hottest themes. Concepts like what a business is actually worth are given lip service at best. And every once in a while, things run so far in one direction that even safe, generous dividends lose their luster. But if you’ve invested for more than a cycle or two, you’ve by now learned the long-term market is more of a weighing machine. And outperforming businesses that gain strength and size over time are eventually rewarded with higher stock prices.