Utility Players Will Save Your Portfolio
October 31, 2018
In baseball, utility players are those that can successfully play various positions as needed by the team. They are the go-to players when the team needs them to come through, either in the outfield or the infield.
Utility stocks serve the same purpose for successful portfolios. Whether in bull or bear markets, utility stocks come through with a combination of better dividends than the general stock market and overall longer-term gains from general economic activity that always demands essential services.
And the proof is ample. For the past 10 years, with all of the economic and market bumps and rallies, utilities have generated an average annual equivalent return of 10.62%, as tracked by the S&P Utilities Index. That’s a powerful boost for any portfolio that’s also invested in other market sectors along the way.
And this year, little has been steady in the general stock market, as tracked by the S&P 500 Index. With a plunge into early February followed by a period of range trading and a further run up until the October plunge, the S&P 500 has barely held on to a return of 3.20%. But the S&P Utilities generated a return with less drama that’s much higher, at 4.69%.
And for the very troubled month of October, utilities moved in the opposite direction of the S&P 500, gaining 2.00% while the S&P 500 lost 6.65%.
Now, for many investors, just adding an indexed investment to the utility sector is a good start. And one of the best indexed investments is the synthetically structured Vanguard Utilities ETF (VPU). This ETF provides exposure to many of the leaders in the American utilities market.
But as with all market sectors, by digging a little deeper into the roster of utility players, you can do even better. Here are three utility companies that will power your portfolio through the thick and thin of the stock market.
NextEra Energy (NEE) is a hybrid of a conventional local regulated power utility services and a largely unregulated national renewable power business.
The company has its base in Florida Power & Light, which, as the name implies, is a division of NextEra that provides regulated power to much of the state of Florida. This perpetually expanding market continues to demand more energy, and FPL is there to deliver. The company delivers energy to nearly 5 million customers, primarily households, with some commercial customers.
This provides a steady base of revenue that empowers NextEra to fund its continued expansion in the state as well as serving to support the continued expansion of its renewable energy business. FPL generates approximately two-thirds of NextEra’s revenue.
The renewable energy business, however, provides the growth engine for NextEra’s shareholders. Through its NextEra Energy Resources (NEER), NextEra provides power largely from wind and solar power installations across thirty states, a collection of Canadian provinces, as well as a joint venture in Spain. It makes up the majority of the remaining third of NextEra’s revenue.
This makes NEER one of the largest renewable energy providers, which also benefits NextEra, with ample regulatory support via mandates for renewable energy and subsidies to further develop wind and solar capabilities.
Overall regulated and unregulated revenues continue to be impressive. And with ample operating margins in both divisions, the overall return on NextEra’s shareholders’ equity is a whopping 27.70%.
And while the dividend could be higher, the current payout of $1.11 provides a yield of 2.57%, which continues to be above the average for the S&P 500. And with dividend coverage at 2.9 times and a payout ratio of only 34.31%, there is room for further payout increases. Projections for the dividend are that it will be increased to $1.25 per share at the next declaration in February. This is in line with the past five year of dividend hikes, which averaged 10.82% per year.
Shares continue to perform. Over the past 10 years, they’ve delivered a return of 409.59%, with a year-to-date return of 12.84%. And for the troubled month of October, NextEra shares have delivered a return of 3.02%.
Alliant Energy (LNT) provides households and companies in Illinois, Iowa, Minnesota and Wisconsin with electricity and natural gas, with the majority of its revenue from the power service.
The company business is in the stable regulated segment of the essential services market as well as the wholesale market. But with the steady to improving growth in its midwestern markets, Alliant’s revenues are up nicely, with the most recent reported gain at 6.64%.
Moreover, the efficiency of the company continues to be impressive, with widening margins for the company. The growth in revenue less the cost of delivering the services is up 7.30% over the trailing year. This is fueling a return on shareholders’ equity at 11.50%—impressive, given the focus on regulated markets.
The dividend is higher in yield than NextEra at 3.11%, and it has a similar history of raising distributions. The average annual hike in payouts over the last five years is running at 7.36% per year. And while the payout ratio is a bit higher, at 63.24%, its cash coverage is 1.60 times. This is plenty acceptable from this sort of steady utility company.
And the shareholders keep being rewarded. Over the past 10 years, Alliant has turned in a return of 332.45%, with a year-to-date return of 4.10%. And it survived the general market rout in October, with shares returning 1.72% for the month against the losses in the S&P 500.
Xcel Energy (XEL) is an electric and gas company serving a collection of states with a focus on local markets in Colorado and Minnesota. It also has transmission lines for electric and gas and like NextEra, it has been ramping up its renewable energy capabilities.
The combination of steady regulated business units and broader unregulated market-driven businesses continues to drive reliable and ample revenues. Its revenue growth, less energy costs, are on the incline over the past year at 2.60%—less impressive than Alliant’s numbers. But the return on shareholders’ equity is comparable to Alliant’s at 10.50%.
Its dividend is similar to Alliant at 3.08%, which has been increasing over the past five years at an annual rate of 6.40%. And the dividend has good cash coverage, at 1.60 times, thanks to its reliable business revenues.
Shareholders have profited over the past 10 years with a return of 317.10%, with the year-to-date return coming in at 4.55%. And for the troubled month of October, shares have returned 4.01%. All of this makes for a great utility for your portfolio.