October 26, 2020 BARRON’S 33
INCOME INVESTING
NextEra is on a roll, up 26% this year. But there’s
no shortage of yield elsewhere in the utility
sector, along withsome downside protection.
Utility Stocks Lag,
But They Offer Safe
And Growing Yields
E
ven though utilities
have rallied recently,
many are lagging the
market this year—de-
spite solid dividends
and durable earnings.
That makes them at-
tractive for yield hunters.
“By and large, your rank-and-file
utility not only has increased the divi-
dend this year, but nobody’s really
taken down their earnings estimates
for this year,” says John Bartlett, a
portfolio manager and analyst at
Reaves Asset Management, which
specializes in utilities and infrastruc-
ture investments.
The earnings estimate for theUtili-
ties Select Sector SPDRexchange-
traded fund (ticker: XLU) is down
about 3% from where it was in late
February, according to FactSet—
hardly a big drop when compared to
more volatile sectors such as energy.
As of Oct. 20, that ETF had re-
turned about 1.5% in 2020, compared
with 8.2% for the S&P 500 index. In
the past month, however, the ETF has
returned nearly 11%, besting the
broader index’s result of about 5%.
Lindsey Bell, chief investment
strategist at Ally Invest, says that “the
interest in utilities more recently re-
flects a defensive move by market par-
ticipants ahead of the election.” She
adds that “utilities provide a solid
dividend and more stability than other
sectors in that type of environment.”
The utilities in the S&P 500 were
recently yielding about 3.2%, com-
pared with 2.7% for consumer sta-
ples—another popular sector for in-
come investors.
Utility stocks have also suffered
because of what they are not—fast-
growing companies in tech and other
sectors that have been popular among
investors this year. The stocks are also
weighed down as investors look ahead
to next year’s earnings estimates in
the various sectors.
“While the S&P 500 should see
25% growth, utilities will likely eke
out only a 3.5% advance,” says Sam
Stovall, chief investment strategist at
CFRA. On the plus side, utilities trade
at a 23% discount to their 20-year
average, based on estimated profits
over the next 12 months, he notes.
Still, the sector isn’t dirt cheap based
on more recent history. The Utilities
Select Sector SPDR ETF fetches about
19 times 2021 earnings estimates—
down from 21.6 times in February but
above the five-year average of around
17.3 times, according to FactSet.
Utility stock performance has been
very uneven during the pandemic.
NextEra Energy(NEE), whose
businesses include the Florida Power
& Light utility as well as a big renew-
able energy portfolio, is “in a class of
its own,” says Reaves’ Bartlett.
NextEra is on a roll. Bucking the
overall trend for the sector, it was up
26% as of Oct. 20, dividends included.
The stock yields 1.8%. Based on a 4-
for-1 stock split effective on Oct. 26,
the company’s quarterly dividend is 35
cents a common share.
But there’s no shortage of yield
elsewhere in the sector, along with
some downside protection.
“The average utility is going to be
able to grow its earnings 5% or so a
year, year in year out, without regard
to what’s going on in the economy,”
says Bartlett, “so if you’re jittery and
looking for a more conservative alter-
native, that’s the story.”
Reaves oversees about $3 billion of
assets, including the $1.6 billion
Reaves Utility Incomefund (UTG).
As of Sept. 30, NextEra was its largest
holding.
The closed-end fund’s 2020 total
return was about minus 8% as of Oct.
20, according to Morningstar. The
fund ranks in the top 20% of its
Morningstar category year to date.
After NextEra, Bartlett says, there’s
a group of quality utilities that have
benefited from investors seeing “great
stability in their earnings.” Those in-
cludeWEC Energy Group(WEC), a
Milwaukee-based firm that generates
and distributes electricity and natural
gas;Xcel Energy(XEL), whose busi-
nesses include generating and distrib-
uting electricity; andEversource En-
ergy(ES). Based in Springfield,
Mass., Eversource handles electricity,
natural gas, and water.
As the accompanying table shows,
the stocks of all three companies have
had respectable returns this year.
Two other utility stocks held by
Reaves include Michigan-basedCMS
Energy(CMS) and Wisconsin-based
Alliant Energy(LNT). Both stocks
yield well above 2%. These compa-
nies, says Bartlett, should benefit
from cost cutting and investing in
renewable-energy projects, among
other factors.
Bartlett also holds some gas-distri-
bution companies, a group that has
faced stiff headwinds. “There’s a con-
stituency of people who don’t want
anything having to do with the carbon
atom—and these companies are in the
business of delivering carbon atoms,”
he says.
He agrees that renewable energy is
gaining traction, but asserts that “we
need gas, and it’s not going away.” One
holding is gas distributorAtmos En-
ergy(ATO), which is based in Dallas
and whose stock yields 2.4%. Its re-
turn this year is about minus 14%.
Analysts polled by FactSet expect the
company to earn $4.71 a share in its
most recent fiscal year, which ended
last month, versus $4.35 in the previ-
ous year.
Another beaten-down holding is
New Jersey Resources(NJR), whose
portfolio includes a clean-energy busi-
ness dedicated to commercial and
residential solar power. The company
is expected to earn $2.06 in its most
recent fiscal year, which ended last
month, versus $1.96 in the prior year.
The stock is down more than 30%
year to date, but last month the com-
pany’s board declared a quarterly divi-
dend of 33.25 cents a share, up 6%.
“A lot of people really pay up too
much for yield,” says Bartlett. “And
really it’s more about the stability of
income at this point than the actual
coupon.”
Utilities, for the most part, continue
to check that box.B
By Lawrence C.
Strauss
Yield Machines
These utility stocks all sport attractive yields and should continue to grow their dividend payouts.
Recent Market Dividend YTD Quarterly Dividend
Company / Ticker Price Value (bil) Yield Return Per Share
NextEra Energy / NEE $299.55 $148.4 1.8% 25.7% 35 cents
Xcel Energy / XEL 71.69 37.7 2.4 15.2 43
WEC Energy Group / WEC 100.40 31.7 2.5 11.1 63.25
Eversource Energy / ES 91.08 31.2 2.5 9.2 56.75
CMS Energy / CMS 64.75 18.5 2.5 5.1 40.75
Alliant Energy / LNT 54.72 13.7 2.8 2.1 38
Atmos Energy / ATO 94.24 11.6 2.4 -14.4 57.5
New Jersey Resources / NJR 28.36 2.7 4.7 -34.2 33.25
Recent prices, returns, and market values as of Oct. 19; other data as of Oct. 20.
NextEra Energy’squarterlydividend reflects an expected 4-for-1 stock split effective Oct. 26. Source: FactSet