The Recession-Resistant Power of Utilities

The odds of a recession within the next 12 months in the U.S. are near 99%, according to the most recent probability estimates compiled by the Conference Board. That percentage isn’t a typo. Most analysts concur that the onslaught of a recession is a lead pipe cinch.

But you don’t have to sit on the bench. You can stay in the investment game, by investing in companies that provide “essential services.”

Whether we’re in an expansion or contraction, in a bull or bear market, people will always need certain necessities.

For today’s Mind Over Markets, I’ve decided to cast a spotlight on an essential services industry with resilient appeal: utilities. In a recession or stock market crash, people will always find a way to pay the power bill.

As economic growth decelerates, you should focus on long-term investment trends that are unstoppable. The growing need for utilities will never wane.

The utility sector outperformed the S&P 500 by 21 percentage points in 2022. Uncertainty over inflation and monetary policy has weighed on utility stocks in recent months. However, after a volatile stretch, I expect the sector to return to steady, fundamental growth in the latter part of 2023 and in the coming years.

Utilities’ balance sheets are strong, dividends are amply covered, regulation is getting more favorable, and the environmental policy of the Biden administration supports infrastructure expansion.

Utilities confer growth, safety and income, in good times or bad. In these fraught market conditions, when the daily news sometimes seems like a nightmare, utilities are a sleep-well-at-night sector.

Buffers against risk…

Utility companies for gas, electric, water and other forms of power often operate under federal and state government regulations. Sure, this oversight can curtail the freedom of management’s decision-making, but it also acts as a barrier to entry in a vital market.

Protected from competitors, utilities can become entrenched as a dominant economic force in an entire community. That helps make utilities recession-resistant. U.S.-based utilities also are buffers against global trade tensions and geopolitical strife, because they derive no revenue from overseas.

Income investors covet the high dividends from utilities. These businesses tend to be stable, generating growing dividends and stock price appreciation over time. Utility stocks add ballast to a diversified portfolio. Unlike bonds, stocks offer potential dividend growth and share-price appreciation.

Utilities may offer more capital appreciation than bonds as the economy weakens this year and investors shift to defensive stocks.

Utilities are sensitive to interest rates. Rising rates pressure utilities, because utility firms tend to have major capital expenditures and high debt-to-market cap levels. However, if the Federal Reserve announces a pause in rate tightening at its policy meeting next week, the utilities sector should get a boost.

You don’t have to be an income investor to love dividend-paying stocks like utilities. Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe harbors in turbulent seas because companies with robust and rising dividends by definition boast the strongest fundamentals.

If a company has the healthy cash flow required to throw off juicy dividends, it follows that the balance sheet is intrinsically sound enough to sustain the firm through corrections and economic downturns.

Despite recession fears, the stock market continues to show vigor. The main U.S. equity indices finished Thursday as follows:

  • DJIA: +0.50%
  • S&P 500: +0.62%
  • NASDAQ: +1.02%
  • Russell 2000: -0.41%

The S&P 500 ended Thursday’s session at its highest closing level in 2023. Traders are apparently expecting good news on inflation and from the Federal Reserve next week. The benchmark Utilities Select Sector SPDR Fund (XLU) jumped 0.44%.

Water, water everywhere…

Let’s now focus on one type of utility that I think stands out as a profitable opportunity, as well as a hedge against current market risks.

In recent issues, I’ve recommended gaining exposure to precious assets such as gold. Want to invest in a natural commodity that’s becoming even more precious than gold? Consider water.

That’s right, water. Societies around the world are increasingly bedeviled by a global water crisis, spawned by climate change, worsening pollution, overpopulation, poor agricultural practices, and the woefully inadequate funding of environmental agencies. Companies involved in the purification and provision of clean water represent the sort of unstoppable trend you should get aboard.

Read This Story: Water: The Most Precious Commodity of All

Mark Twain predicted our global water crisis more than 100 years ago when he famously said: “Whiskey’s for drinking, water’s for fighting over.” Scarce even then, water is in critically short supply now — and the scarcity is getting worse.

According to a recent study from the scientific journal Nature, the world’s stores of groundwater, which accumulate over millennia in aquifers, are vanishing at an alarming rate. The result is persistent demand for reliable sources of clean, potable water.

Human beings will continue to need water, regardless of the cyclical gyrations of the stock market and economy. Water utilities are particularly recession-resistant.

The wildfires this week in Canada that are darkening New York City skies are yet another wake-up call about the environment. Climate change is exacerbating pollution and extreme weather, which in turn threatens natural water supplies.

Whether you think rising global temperatures are human caused or not makes no difference: the overwhelming scientific consensus is that the world is getting hotter. You can expect a steadily increasing number of fierce storms and weather anomalies to wreak mayhem.

According to recent projections from the U.S. Environmental Protection Agency, our nation’s water infrastructure requires an investment of at least $384.2 billion. Wastewater infrastructure requires an additional $300 billion.

Meanwhile, as the following chart shows, global water demand is booming:

For evidence that the need for clean water represents a long-term investment trend, look to Saudi Arabia.

The House of Saud is interested in more than just golf. The desert kingdom has launched a sweeping strategy to modernize and diversify its economy. By 2030, the Saudis expect non-oil government revenue to increase six fold. Among these initiatives is a huge investment in water purification, production, storage, and distribution.

When a powerful oil-dependent nation such as Saudi Arabia stakes its future on the clean water industry, you should sit up and take notice. The time to jump aboard this moneymaking theme is now, before the rest of the investment crowd catches on and water plays get too pricey.

Many investors consider utility stocks to be “boring.” If everything that I’ve just described is boring, sign me up.

John Persinos is the editorial director of Investing Daily. He also edits the premium trading service, Utility Forecaster.

The chief investment strategist of Utility Forecaster is our income expert, Robert Rapier, who also helms Rapier’s Income Accelerator and Income Forecaster.

Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.

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