The U.S. Federal Reserve has finally lowered the benchmark rate by 50 basis points, bringing down rates to a range of 4.75%-5% from the 5.25%-5.5% range. The rates were lowered for the first time in four years, much in line with the expectations of the financial market.
Capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The performance of the rate-regulated utilities remains steady through different economic cycles, and it allows them to reward shareholders with dividend payments, often considered substitutes for bonds.
Utilities like National Grid plc. NGG, American Water Works Company AWK and Evergy Inc. EVRG from the Zacks Utilities sector will continue to put up a stable performance, which allows them to reward shareholders with regular dividend payments. All these utilities have significant long-term investment plans.
Utilities need external sources of funds to improve and expand infrastructure as their internal sources are not always sufficient to meet large capital requirements. Utilities add clean energy sources to their electricity generation process to trim emissions, strengthening and expanding transmission and distribution pipelines to efficiently serve customers. Water utilities invest heavily to upgrade and change the old water mains and distribution lines to provide better services.
The rate decline will improve the prospects of capital-intensive utilities as their capital servicing cost will go down, boosting margins and profitability. These utilities, with cost management, new electric, gas and water supply rates, and demand improvement through customer growth, will perform better.
It will be wise to invest in the following utilities with a favorable Zacks Rank, rising earnings estimates, beta less than 1 indicating less volatility than the market and a strong dividend yield. These stocks also have a strong times interest earned ratio, which indicates the financial flexibility of these companies to meet present and future interest obligations.All these stocks returned higher than their sector's 12.4% rally in the past three months.
Price Performance (Three Months)
Image Source: Zacks Investment Research
National Grid.: National Grid’s strategic investment plans are likely to expand its operations and boost its performance. NGG plans to invest more than $52 billion by 2026 in the United Kingdom and the United States, per its five-year spending framework. NGG aims to achieve net zero scope one and two emissions by 2050, with interim targets of a 50% reduction by 2030 and 34% by 2026 from the 2018/19 baseline. The stock currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Three-Month Return = 21.1%
Long-term EPS (three to five years) Growth:3.15%
Dividend Yield = 7.03%
Beta = 0.61
Estimate Movement = The Zacks Consensus Estimate for the fiscal year ended March 31, 2025 earnings has moved 0.9% north to $4.58 in the past 60 days.
Times Interest Earned ratio:2.8
American Water Works: American Water Works, along with its subsidiaries, provides water and wastewater services to millions of Americans. The company continues to expand operations through acquisitions and organic means. American Water Works plans to invest $3.1 billion in 2024 to strengthen and expand its existing infrastructure. AWK aims to invest $16-17 billion in 2024-2028. The company currently has a Zacks Rank #2.
Three-Month Return = 15%
Long-term EPS (three to five years) Growth:8%
Dividend Yield = 2.04%
Beta = 0.69
Estimate Movement = The Zacks Consensus Estimate for 2024 earnings has moved 0.6% north to $5.27 in the past 60 days.
Times Interest Earned ratio:3.5
Evergy Inc.: Evergy, along with its subsidiaries, generates and supplies electricity to customers. The company targets nearly $12.5 billion of expected base capital investments through 2028, including a new generation of around $2.9 billion, which is expected to be a renewable one. The company currently has a Zacks Rank #2.
Three-Month Return = 17.7%
Long-term EPS (three to five years) Growth:5.85%
Dividend Yield = 4.15%
Beta = 0.62
Estimate Movement = The Zacks Consensus Estimate for 2024 earnings has moved 0.3% north to $3.85 in the past 60 days.
Times Interest Earned ratio:2.4
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."
Since 1988, the full list has beaten the market more than 2X over with an average gain of +23.7% per year. So be sure to give these hand picked 7 your immediate attention.
See them now >>National Grid Transco, PLC (NGG) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Evergy Inc. (EVRG) : Free Stock Analysis Report
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