Roger S. Conrad

There’s just three weeks left until New Year’s Eve. And the Dow Jones Utility Average is still down –6.2 percent in 2023. That leaves the sector on track for its worst performance since 2008, barring a powerful end-year rally,—though that year’s -27.8 percent demolishing is in a whole different league.

Since early October, however, the DJUA is up 11.5 percent, topping even the robust returns from the S&P 500 and the big technology stock Nasdaq 100. And the biggest winners the past two months have been the stocks that were beaten up the most through September, for example AES Corp (NYSE: AES) with an 60 percent-plus return.

My view: We’re in the early stages of a utility sector re-rating and stock price recovery.

UK electric utility SSE Plc (London: SSE, OTC: SSEZY) has “rebased” its twice-annual dividend to a new rate of 60 pence, starting with the March 2024 payment. That’s roughly -38 percent less than the previous annualized rate of 96.7 pence. As noted in my Utility Report Card comments, management stuck to its previous full-year FY2024 (end March 31) earnings guidance range, with a mid-point of GBP1.50 per share. That was despite what appeared to be disappointing results for the first half (end September 30), as adjusted EPS sank by roughly -11 percent.

Will a massive sector rotation propel market averages to new heights in 2024? Or will a bursting of Big Tech’s valuation bubble combine with a weakening economy and relentless upward pressure on interest rates to send the autumn recovery into full reverse? Either way, the stocks in the CUI Aggressive, Conservative and Top 10 Holdings portfolios are ready. That follows the release of strong Q3 results and guidance updates that frankly seemed to shock many.

When investment markets get roiled, most people assume the future holds more of the same. And so it is with the nearly unanimous consensus forecast of “higher for longer” interest rates. I still see a decent chance the Federal Reserve will raise the benchmark Fed Funds rate at least one more time this cycle, to bring its benchmark for inflation back to a long-term target rate of 2 percent. But so far as borrowing costs are concerned, the damage is done.

Will higher for longer interest rates derail utilities’ inflation-beating dividend growth? The Dow Jones Utility Average’s total return is 27 percentage points behind the S&P 500’s so far in 2023, a wider gap than in 1999. So obviously, the Wall Street consensus has been yes. Reality says different. In fact, no fewer than 48 of the 172 companies in my Utility Report Card coverage universe raised their 2023 guidance after releasing Q3 results. A third that many reduced guidance, but none cited higher interest rates as a primary reason.

Evergy Inc (NYSE: EVRG) cut the mid-point of its annual target growth range from 7 to 5 percent. But every other company in the coverage universe affirmed previous projections. Several announced meaningful capital spending increases.