Roger S. Conrad

The Dow Jones Utility Average finished 2023 with a -5.2 percent loss including dividends. That’s the worst performance for utilities since 2008.

It’s a far cry from that year’s -27.8 percent pummeling. But the DJUA’s 31.3 percentage point underperformance of the S&P 500 is actually worse than 1999—when a similar combination of rising interest rates and soaring technology stocks soured many investors on dividends.

So in 2024, utility stocks have outperformed, as they have since early October. One big reason to expect more gains: A massive decline in companies’ borrowing costs that’s occurred well in advance of any Federal Reserve easing.

Last year’s big drop in shares of NextEra Energy Partners (NYSE: NEP) and parent NextEra Energy (NYSE: NEE) was sudden and staggering. Ironically, their recovery should be just as breathtaking. In the October 5 Income Insights “Regarding NextEra,” I stated the case for a comeback. And since then, the parent has returned nearly 30 percent, while Partners has gained almost 50 percent. Here’s why I think that’s just the beginning.

It’s fair to say Conservative Holding TC Energy (TSX: TRP, NYSE: TRP) faced a mountain of skepticism from investors last year. That started with significant cost overruns announced at the Coastal GasLink pipeline in late 2022. Many doubted the company would ever finish the project, or execute on funding the additional costs with CAD5 billion of asset sales. And even more have dismissed the planned spinoff of oil pipeline assets as caving into ESG pressures.

Calendar year 2023 is in the books. Our Aggressive Holdings managed a 9 percent average return. Conservative Holdings dropped -2.6 percent and the Top 10 DRIPs lost -1.9 percent. Those returns compare to a -5.2 percent decline in the Dow Jones Utility Average. Other indexes relevant to portfolio holdings include the Alerian MLP Index (up 25.4 percent), iShares Select Dividend ETF (up 1 percent), the Nasdaq Clean Energy Index (-9.8 percent) the S&P Energy Index (-1.4 percent) and the S&P Telecom Services Index (up 2.7 percent).

Six companies in the Utility Report Card coverage universe cut dividends in 2023. That’s been about the average count for most years since the mid-1980s, when I began tracking utilities and essential services stocks. But having so few last year was quite a demonstration of sector resilience.

Cutting debt, strategic M&A and regulatory breakthroughs were “in” last year. High levels of debt and renewable energy were “out.” That’s the verdict of my annual roundup of utility and essential services company returns, highlighted in this month’s Utility Report Card. Divergence between individual companies in 2023 was roughly the same as in 2022, with 216.2 percentage points separating the top and bottom of my table “Best and Worst of 2023” versus 206.6 a year ago. And thanks to a pair of massive sector out-performances, my 2023 picks narrowly edged the pans—with both groups topping the Dow Jones Utility Average by more than 20 percentage points.

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.