A “rumored” merger offer from NextEra Energy (NYSE: NEE) did more than ignite a rally in Duke Energy (NYSE: DUK) shares this month. It appears to have breathed new life into the whole utility sector, which with few exceptions has consistently lagged the S&P 500 this year.
A comeback has been overdue for some time. US utilities demonstrated their business resilience in troubled 2020. And they’re poised to accelerate growth by cashing in as the world transitions to suddenly cheap renewable energy and adopts ultra-fast 5-G communications.
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More than two-thirds of new power generation capacity installed worldwide this year was wind and solar. And in the US, most was either long-term contracted or entered utilities’ regulated rate base. In fact, all of the world’s leading developers of renewable energy now are utilities, led by America’s top wind and solar producer NextEra Energy (NYSE: NEE).
Roughly 10 percent of Utility Report Card companies have yet to report Q2 results and update guidance. That’s more than enough of a sample to draw one very powerful conclusion:
In the worst economy in 90 years, the utilities and essential services business model has proven its resilience.
Last quarter, US GDP contracted 9.5 percent and most of the world did much worse. But most coverage universe companies posted stable earnings that supported dividends and strong balance sheets. And they kept long-term growth strategies on track.
Just how much damage is Covid-19 fallout doing to corporate earnings, dividends and balance sheets? We’ll get our best indication yet over the next month or so, as the vast majority of coverage universe companies report calendar Q2 results and update guidance.
The good news is regulated utilities appear to be tracking the expectations management communicated during Q1 earnings calls. Conservative Holding Sempra Energy (NYSE: SRE) in late June actually raised the mid-point of its 2020 earnings guidance from $7.10 to $7.50 per share.
In first half 2020, COVID-19 fallout triggered the sharpest global economic and stock market plunge on record. Now relaxing of pandemic control measures has raised hopes for an equally dramatic recovery the rest of the year.
China was first hit by the virus and first to take control of its spread. And while certainly not back at 100 percent, its economic rebound is picking up speed.
That’s not only good news for Aggressive Holdings China Mobile (HK: 941, NYSE: CHL) and CLP Holdings (HK: 2, OTC: CLPHY). It also bodes well for durability of green shoots we’re seeing in America, including signs of steadying power demand reported by Utility Report Card electric utilities.
About nine of every ten Utility Report Card coverage universe companies have now reported Q1 earnings and updated guidance. Takeaway number one: Even among essential services providers, COVID-19 fallout varies greatly.
Every earnings season my first priority for analysis is the Portfolio. Despite the unprecedented uncertainty, I’m happy to report the vast majority of recommended companies were able to issue meaningful guidance. And not only that, the updated forecasts are by and large in line with their expectations three months ago.
That’s truly extraordinary, considering the global economy has suffered its most dramatic setback since the Great Depression of the 1930s. There’s no guarantee even the best in class of essential services won’t ultimately succumb, if the big picture gets cloudy enough.
Over the past two weeks, the Dow Jones Utility Average has recouped nearly two-thirds of its initial bear market plunge. That’s the sector’s most dramatic two-week rally in history, following its most brutal one-month selloff.
Along the way, we’ve been able to buy every Portfolio stock below its maximum entry point. And 30 have traded under “Dream Buy” prices, levels only reached under extreme conditions like those we’re living through now.
The question now is will utilities’ current “V” shape recovery continue? Or will stocks follow the pattern of every previous market and at least retest the lows?
On the positive side, the spread of COVID-19 appears to have eased up in some hard-hit areas, particularly China. That’s raised hopes the world can go back to work in the relatively near term.
From shuttered schools and cancelled events to disrupted supply chains, it looks like COVID-19—the coronavirus—is only starting to wreak havoc on the global economy. The big questions for investors: Where will the blows hit hardest and what if anything will be spared.
The market’s wild recent action is basically from bets being placed on the answers. So far, US Treasury bonds are in the winners’ circle. The yield on 10-year notes slipped to just 66 basis points at one time last week.
For the eighth year in the past 10, utility stocks finished January in the black. Every time but 2015, they finished the year that way, including a 27.3 percent boost in the Dow Jones Utility Average for 2019.
Conversely, you’d have to go back to 1987 to find a year when a strong January was followed by a sector selloff later on. Every other major DJUA decline was instead preceded by a first month selloff including 2008, 2002, 2001 and 1994.
A big January is therefore a favorable portent for our returns in 2020. So are the calendar Q4 earnings and guidance updates we’ve seen so far for Utility Report Card coverage universe companies, highlighted in the comments of this month’s table.
It was a great year for utility stocks with the Dow Jones Utility Average returning 27.3 percent. It was also the best yet for our loaded laggards strategy: Conservative Holdings returned 35.1 percent, Aggressive Holdings 31.2 percent and the Top 10 DRIPs 36.5 percent.
One key catalyst for our outperformance was a spike in investor interest for anything to do with renewable energy. We also mostly eschewed stocks with historically valuations and successfully avoided companies with weakening underlying businesses.
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Roger's current take and vital statistics on more than 200 essential-services stocks.