Recession-Resistant Utilities, Fact or Fiction?
- Mar 25, 2020 11:04 pm GMT
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.”