Janet Yellen Doesn’t Scare This High-Yielding Utility Stock
In Homer’s epic tale, Odysseus and his shipmates were compelled to navigate the narrow waters between two mortal dangers: the sea monster Scylla and the devouring whirlpool Charybdis.
Utility investors today likewise face a Scylla-and-Charybdis dilemma: rising interest rates and inflation.
Put another way, they’re stuck between a rock and a hard place. When utilities contend with rising interest rates or higher input costs, the weakest companies often reduce their dividends to conserve cash.
Below, I show you how to navigate safely through these twin risks and, like our Greek protagonist, live to tell the tale.
Let’s start with Federal Reserve Chief Janet Yellen and her lair in the Marriner S. Eccles Building in Washington, DC.
Between a rock and a hard place…
All eyes this week are on the Federal Open Market Committee, which begins a two-day meeting on Tuesday. In the wake of last Friday’s positive jobs data, the central bank’s monetary policy-making group is expected to announce another interest rate hike on Wednesday.
Investors were pleased with the latest U.S. jobs report released March 10, which showed the U.S. economy added 235,000 jobs in February while the unemployment rate dipped to 4.7%.
The Bureau of Labor Statistics report also showed average hourly earnings rose by 6 cents in February, accelerating the rate of wage growth from last month. Earnings are now up 2.8% over the year.
The new employment data was unexpectedly strong and should dampen fears that the economy is heading for a recession.
Ari Charney, chief investment strategist of Utility Forecaster, underscores how the table is set this week for another interest rate hike:
“We’ve got an economy that appears to be approaching full employment and a sudden jump in inflation that could presage more robust growth ahead…
The U.S. Federal Reserve has made a concerted effort to signal that it plans to hike rates by another quarter-point at its next meeting. Indeed, traders are now betting that there’s a 100% probability of a rate increase on March 15, up from 40% at the end of February…
Of course, the Fed had expected to raise rates four times last year, but only managed to do so once, as the year came to an end. But the macro picture appears to be brightening, and the Fed seems to be getting much more serious about monetary tightening.”
The dumb money…
Selling inherently strong utilities because the Fed is about to boost rates from their historic lows is, frankly, a dumb move.
To be sure, rate-sensitive investments such as utility stocks get clobbered when rates are rising, because utilities must borrow large sums of money for capital expenditures.
As rates go up, their rising cost of capital weighs on share prices. Moreover, safer rate-pegged investments such as U.S. Treasuries become more enticing from a risk-reward calculation.
That is the textbook theory, anyway. But the fact is, investors should stick with the best utility stocks, regardless of rate fluctuations.
Ari lives and breathes utility stocks. As he puts it: “Despite these concerns, there’s still room for hope about the utility sector’s prospects at a fundamental level, even if rising rates weigh on share prices. After all, stronger economic growth will drive stronger electricity sales.”
In this context, a utility stock that makes an appealing total return package is UF’s Growth Portfolio Core Holding NextEra Energy (NYSE: NEE).
This high dividend-paying stock boasts sturdy earnings and revenue, an ironclad balance sheet, and the wherewithal to weather the volatility ahead. With many analysts now calling for a correction in 2017, NextEra should provide the income as well as safety you need.
Sporting a market cap of $60.8 billion, NextEra Energy is a major provider of “green” alternative energy with a generation capacity of about 45,900 megawatts.
Since 1980, this stock has never stuck investors with two consecutive years of losses. About 60% of the company’s earnings stem from regulated utility operations, with the rest from wholesale power generation, providing diversity that should buffer the stock from the ups-and-downs of the broader markets.
The company has a trailing 12-month return on assets of 3.1 and a trailing return on equity of 12.4, both higher than the industry average. The stock boasts a dividend yield of 3.93%, with a six-year track record of rising dividends.
The average analyst consensus is that NEE’s year-over-year earnings growth will reach 5.4% in the next quarter, 7.1% in the current year, 7.2% next year, and 6.7% over the next five years (on an annualized basis).
Since Ari Charney added NextEra to the portfolio on October 2, 2013, the stock has generated a whopping total return of 614.6%. This stock makes a superb growth-and-income play, no matter what Fed Chief Janet Yellen and her cohorts decide this week.
Got a question? Drop me a line: firstname.lastname@example.org — John Persinos
Trading without speed limits…
This axiom is drilled into most investors’ heads: find an intrinsically strong but reasonably valued stock, add it to your retirement portfolio, and just sit tight. That mode of investing has dominated thinking for decades.
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