Roger S. Conrad

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.

Shares of Aggressive Holding Atlantic Sustainable Infrastructure Plc (NSDQ: AY) have lost almost one-third of their value this year. That’s pushed the dividend yield well north of 10 percent, a level last seen in early 2016. That’s when the bankruptcy of then-parent Abengoa SA threatened numerous company projects with potential cross-defaults. That forced Atlantica to hold in cash by suspending its dividend for six months. And it wasn’t until June 2021 that the payout was fully restored to the pre-suspension rate.

About a year ago, Dominion Energy (NYSE: D) announced a “top-to-bottom” strategic review. Management’s objective: To tackle three headwinds that were rapidly approaching hurricane force. Most important was ensuring the cost of the Coastal Virginia Offshore Wind (CVOW) project wouldn’t balloon as other US offshore wind has. But the utility also had to reach an accommodation with a restive new Republican majority in the state legislature that was determined to roll back Democrats’ signature renewable energy law. And it had to cut parent level and floating rate debt with interest rates soaring.

The Dow Jones Utility Average closed last week roughly -22 percent off the all-time high of 1077 reached in April 2022. The S&P Utilities is about as far below its all-time high from September last year. And both indexes have underperformed the S&P 500 by about 40 percentage points since making those highs. That’s pretty substantial underperformance. And the same is true for dividend-paying sectors across the board—Not much lately has beaten the humble money market fund.