Issues

Q3 numbers and guidance updates are almost all in. And rarely if ever have I seen results so immediately consequential for utilities and essential service stocks—as investors ascertain whether business growth plans will withstand headwinds from inflation, rising interest rates and a potentially severe recession.

The 42 Utility Report Card companies raising guidance have answered any questions about their strength for now. And their stocks have staged a big recovery rally from October lows. That includes several companies that faced extreme doubt going into reporting season, notably Aggressive Focus stock AT&T Inc (NYSE: T) and Hannon Armstrong Sustainable Infrastructure (NYSE: HASI).

The income stock selloff that began in mid-September has picked up steam this month. The Dow Jones Utility Average is now underwater by –9.42 percent year-to-date including dividends, and nearly -19 percent since almost hitting a new all-time high last month.

That’s for sure a massive outperformance of the S&P 500, which has resumed its year-long slide and is down almost -24 percent for 2022. And with the exception of oil and gas stocks, utilities are also well ahead of almost everything else in the income investing universe, particularly bonds with the 10-year Treasury note yield again pushing towards 4 percent.

Stocks’ summer rally swung into reverse starting mid-August. And with the Federal Reserve pushing hard against stubbornly high inflation, it’s unlikely we’ve seen maximum damage or duration of what’s looking more and more like a real bear market.

Among the very few pockets of strength are regulated utilities. Even as the S&P 500 is again at a -17 percent year-to-date loss and income benchmark iShares Select Dividend ETF is in the red by -1.6 percent, the Dow Jones Utility Average is well in the black with a 5.66 percent total return.

The Dow Jones Utility Average has returned roughly 6 percent year to date. That compares with a -12 percent decline for the S&P 500, even after the past month’s torrid rally. Re-shoring of investment to the US, growing popularity of domestic businesses, low relative valuations and utilities’ well-earned reputation for resilience are four good reasons for outperformance. And as the feature article highlights, benefits from the Inflation Reduction Act of 2022 are a solid fifth.

Earlier this month, a prominent Wall Street firm noted retail investors aren’t buying stock market dips, for the first time in quite a while. That’s absolutely understandable with the S&P 500 underwater nearly -20 percent so far in 2022, and many of last year’s high-tech favorites much deeper in the red. Utilities and essential services stocks too have had their share of ups and downs. But despite a great deal of uncharacteristic volatility, the Dow Jones Utility Average is still slightly in the green year-to-date, including a basically flat performance since the June issue of CUI posted.

Jagged daily volatility has become the rule for stocks this spring, including dividend payers backed by the steadiest of businesses. That’s historically been a classic sign the market has entered a bearish phase.

But if you have the courage, energy and wisdom to pick your own stocks, it’s hardly a sign to head for the hills. In fact, opportunities abound for both buying low and selling high.

The Federal Reserve is getting serious about reining in inflation. And the kind of big money that never rests for long has apparently decided US utility stocks are an ideal haven.

The happy result: After lagging the past couple years, the Dow Jones Utility Average has pushed out to a 10 percent year-to-date return. That’s even as the S&P 500 has retreated -5.5 percent and the Nasdaq 100 is down -12 percent. 

After briefly rising over 1,000 for the first time, the Dow Jones Utility Average is in the black this year. That means essential service companies, including big communications stocks, are outperforming pretty much everything this side of oil and gas.

Electric, gas, energy infrastructure, water and communications service providers are the kind of substantial, reliable, dividend paying companies investors like to hold in turbulent times. And early 2022 certainly qualifies, with the highest inflation in 40-plus years, a diminished but lingering pandemic, continuing supply chain disruption and now a full-on war.

Stocks with sustainable 5 to 7 percent annual dividend growth: That’s how we’ll beat the current 40-year high in inflation, which pretty much caught the world’s central bankers napping.

The best place to hunt for companies to do that job is my Utility Report Card coverage universe—and particularly the stocks I recommend in the Conrad’s Utility Investor Portfolios.

Normally six months into a new quarter, the vast majority of companies I track would have released earnings and updated guidance. End-year filing requirements will extend the Q4 reporting period well into next month. But from what I’ve seen so far, the best in class are well on track to continue raising dividends faster than the current rate of inflation—and some much faster like Conservative Focus stock NextEra Energy Partners (NYSE: NEP) at 15 percent plus.