Portfolio Article

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.

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.

Let’s not sugarcoat it: Utility stocks are having one of their worst years in quite a while. And the going has been even worse for a whole host of companies in the Utility Report Card coverage universe, especially renewable energy stocks and almost all small-to-mid-sized communications companies. The damage is there to see in this issue’s URC comments, which highlight total returns for the first nine months of 2023.