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Recession-Resistant Utilities, Fact or Fiction?

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Nevelyn Black's picture
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Nevelyn Black is an independent writer with a background in broadcast and a keen interest in renewable energy.  In the last few years, she transitioned from celebrity interviews and film shoots...

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Utility companies have long been considered a safe play for investors but how has the recent stock market crash, brought on by the outbreak of COVID-19, impacted the energy sector? Some analysts think the sector will serve its traditional role during the coronavirus-driven decline. Some say the safe play is not a sure thing this time.  The five largest companies by market cap, accounting for roughly 42% of the value of the whole sector, have been down an average of -29% since the market peak of February 19th.  However, NextEra, Dominion Energy and Duke Energy currently provide an average dividend yield of nearly 5%.    Despite recession concerns following the outbreak, many utilities are confident they will weather the storm undisturbed.  Sempra Energy officials projected earnings of between $2.3 billion to $2.6 billion by 2021, some 1.8 times more than its adjusted earnings in 2017.  "At Sempra Energy, our five-year capital plan – the most robust in our company's history – gives us great visibility into sustainable earnings growth that should help create long-term value for our stakeholders.” said Sempra CEO, Jeff Martin.   This five-year plan of $32 billion primarily focused on investments supporting safety, reliability and sustainability across San Diego Gas & Electric Co. (SDG&E), Southern California Gas Co. (SoCalGas) and Oncor Electric Delivery Co. LLC.   DTE Energy also believes it is well funded and able to withstand the coming recession.  Detroit-based electric and gas utility, DTE Energy not only generates electricity traditionally but has become a leader in renewable energy.  Most appealing to investors may be the utilities unique portfolio with approximately 25% of revenues coming from non-utility operations. “We continue to see the US utility sector as highly defensive,”  wrote Stephen Byrd, a utility analyst at Morgan Stanley.  Byrd continued, “Commercial electricity usage is likely to be very weak (in the first half) but we currently see this as a manageable and temporary effect for the sector.”

So far, no utilities in the S&P 500 have cut or suspended their dividends due to the fallout from the coronavirus pandemic, according to S&P Dow Jones Indices.  Concluding with cautious optimism, Sempra CEO, Jeff Martin said, “You’re right, there’s a fair amount of uncertainty but if you think about all the different places you can invest your time and your resources, I think the American utilities industry is a great place.”

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Rakesh  Sharma's picture
Rakesh Sharma on Mar 26, 2020

I think a lot of it is due to the fact that utilities (and electricity) are classified as essential services and remain open for business during the pandemic as opposed to other sectors which have largely shut down. That said, utility stocks did slide down by more than 20 percent in the last week. 

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