Feature Article

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.

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.