Roger S. Conrad

On September 18, the Federal Reserve cut the benchmark Fed Funds rate by 50 basis points, to a range of 4.75 to 5 percent. The long awaited pivot from “higher for longer” interest rates ignited an investment media frenzy. But since then, the Dow Jones Utility Average is up less than 1.5 percent, barely matching the S&P 500.

That’s hardly surprising. From mid-April when rate cut talk started heating up until the Fed finally acted, the DJUA soared nearly 30 percent. So utility stocks were already pricing in the initial shift.

In a year of foolish politics-based investing decisions, giving up on Mexico ranks highly. Since mid-April, the Peso has lost more than -15 percent of its US dollar value. And that’s pushed America Movil (Mexico: AMXB, NYSE: AMX) ADRs down -10.8 percent year to date, despite consistent strong operating results. The politics case for selling Mexico partly stems from the overwhelming victory of the Morena party in the country’s recent elections, resulting in a controversial justice system overhaul. The other half is fear of potential dislocations from a prospective Trump presidency.

There’s less than three months to go in 2024. And utilities and essential services stocks are already set for their most profitable year this decade. In fact, just a normal seasonally strong Q4 performance would produce the Dow Jones Utility Average’s biggest gains since 2000. The DJUA’s 23.9 percent year-to-date gain puts it ahead of the S&P 500’s 20.8 percent, as well as the Nasdaq 100’s 18.4 percent. And utilities have so far outpaced rivals in the equity income universe as well, with the S&P REIT Index ahead just 12.9 percent and the Dow Jones Select Dividend Index (DVY) up 17.3 percent.

During the first nine months of 2024, 116 essential services companies tracked in the Utility Report Card raised dividends at least once. Eight reduced or eliminated their payouts, disproportionately from the telecom sector. Telephone and Data Systems (NYSE: TDS) cut its payout -79 percent. That reflects the proposed sale of wireless operations of its US Cellular Corp (NYSE: USM) affiliate to T-Mobile US (NSDQ: TMUS) for $4.4 billion.

In August 2023, I highlighted the communications sector in a feature piece titled “Telecom Has a Future, But Not Every Company Does.” My premise was communications is more essential than ever to a functioning world. And as more industries adopt artificial intelligence, it will only become more vital, even as total global penetration of smart phones tops 100 percent later this decade.

Not every big utility stock hit a 52-week high in the past month. But with the Dow Jones Utility Average up nearly 20 percent year to date, a baker’s dozen Portfolio stocks sell for more than their highest recommended entry points. That’s a massive turnaround from earlier this year. Consistent, strong earnings have been one factor: 26 Utility Report Card companies raised guidance after releasing Q2 results.

And only one of the 8 that cut was actually a regulated utility, weather-impacted gas distribution utility Spire Inc (NYSE: SR). The health and growth of underlying businesses always drives long-term investor returns. As the Portfolio discussion highlights, Conrad’s Utility Investor recommendations are on the right track.

In 1996, US telecommunications deregulation broke up the Baby Bell monopoly. But contrary to the best efforts of regulators, politicians and especially competitors, market share consolidation has accelerated ever since. Now it’s the end game. AT&T Inc (NYSE: T), T-Mobile US (NSDQ: TMUS) and Verizon Communications (NYSE: VZ) increasingly dominate the still growing and rapidly evolving market. And the battle has shifted to convergence, as the Big 3 combine fiber broadband and 5G wireless networks to better hold onto customers, boost revenue and cut costs.

Fool me once shame on you, but fool me twice shame on me: That seems to be what many think of AES Corp (NYSE: AES), selling for 8.2 times expected next 12 months earnings and yielding north of 4 percent. In contrast, Wall Street is positive, with 10 research houses tracked by Bloomberg Intelligence rating buy versus 3 holds and no sells. And management raised 2024 earnings and EBITDA guidance in early August, reaffirming expected annual growth of 7 to 9 percent for earnings and 5 to 7 percent for EBITDA through 2027.