Portfolio Article

Big utility stocks stayed on a winning streak last month. The Dow Jones Utility Average is now up nearly 20 percent year-to-date. That’s about 10 percentage points better than the Big Tech stocks in the Nasdaq 100. And it’s out ahead of the S&P 500’s 14.5 percent. Despite the rally, utility stocks also remain historically under owned. The biggest in the S&P 500—NextEra Energy (NYSE: NEE)—has crept up to #52 from #55 a month ago. But it’s less than a third of a percentage point of the overall index. And you have to go down to 101th place to find another utility, Southern Company (NYSE: SO) at just 21 basis points of the index.

The Dow Jones Utility Average lagged the S&P 500 by 12.5 percentage points in the first half of 2024. But the first month or so of Q3 has witnessed a dramatic reversal of fortune: It’s utilities beating the broad market average by more than 14 points. And the DJUA is more than 18 points ahead of the Big Tech stocks in the Nasdaq 100. There are several reasons why this great rotation will continue. First, after roughly a year and a half of underperforming the broad market and Big Tech in particular, utility stocks are greatly under-owned by giant passively and actively managed investment portfolios that dominate the market.

Utility stocks had their moments in first half 2024. But with the Federal Reserve sticking to a “higher for longer” interest rate policy, it’s little surprise the Dow Jones Utility Average finished the first six months of the year well behind broader stock market averages, lagging the S&P 500 by 12.5 percentage points. Boosted mainly by strong performance of four stocks—Constellation Energy (NYSE: CEG), MDU Resources (NYSE: MDU), NextEra Energy (NYSE: NEE) and Vistra Corp (NYSE: VST)—the Conrad’s Utility Investor model portfolios did somewhat better.

All Utility Report Card companies have released calendar Q1 results and updated guidance, save a pair of floundering renewable energy companies flirting with bankruptcy: FuelCell Energy (NSDQ: FCEL) and SunPower (NSDQ: SPWR). For Portfolio companies, the verdict from later reporters’ results is the same as from the early returns. Number one, all of our companies are on track with the investment plans behind long-term earnings and dividend growth guidance.

Roughly 3 in 4 Utility Report Card companies have released their calendar Q1 results and updated guidance. Most of the rest should do so in the next week to 10 days. This issue’s company-by-company URC comments highlight what investors need to know about the results so far. That includes the 29 portfolio utilities issuing their numbers. And I’ll have my thoughts on the rest in next’s month’s issue, or beforehand for portfolio recommendations if action is needed.

To pivot or not to pivot—That’s the question the Federal Reserve continues to ponder in spring of 2024. Every stray data point on inflation seems to heighten the sense of inertia. And with benchmark interest rates indeed staying higher for longer, investors’ fear of debt and general disinterest in dividends persists. But there are signs sentiment is at last starting to shift. Changing allocations and a highly volatile quarterly payout makes the iShares Select Dividend ETF (NYSE: DVY) a poor proxy or substitute for a well-chosen portfolio of dividend stocks. But the ETF does follow the Dow Jones Select Dividend Index of 99 high yielding stocks and has definitively resumed the uptrend it began in late October.

Last month, I highlighted three key takeaways, drawn from the Q4 results and guidance updates of Utility Report Card members I’d seen so far. They were: Number one, results and guidance demonstrated very healthy and growing business. Recommended companies met my chief criterion for continuing to own them, as well as add to current positions when appropriate. Second, every company affirmed its guidance for earnings growth as well as capital spending plans fueling it. And more than a few actually raised long-term investment targets.

Dividend increases—even big ones—don’t necessarily move stock prices. That much is clear from the mostly lackluster year-to-date performance of the 24 Utility Report Card companies raising dividends so far in 2024. Over time, however, prices of dividend paying stocks will follow payouts higher. And in the meantime, there are few more reliable outward signs of a company’s inner grace—that is, that the underlying business is still solid and the underlying value proposition of the stock is intact.

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).

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.