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How Utility Stocks Maintained Sparks

Rising interest rates and inflation are usually high-value utility stock circuit breakers, but these are Unusual times..

This sector is second only to energy in the United States since the beginning of the year, 15 percent above the S & P 500 until Friday. As a result, utility stocks trade on average at nearly 20 times their 12-month earnings. It’s close to the highest ever and nearly one-fifth more abundant than the S & P 500. The Covid-19 market was the last time utilities acquired such a high premium. I panicked in March 2020. Stable sectors have typically traded at small discounts on a wider range of indices over the last decade.

The market is afraid of recession, so it’s the business of collecting monthly checks Naturally attractive To investors. Consumers who are short of cash are more likely to stop eating out or shopping before they run the risk of being cut off from electricity or gas. Also, according to Jay Rhame, CEO of Reaves Asset Management, which manages public utility exchange-traded funds, some criteria make utilities look more defensive than in the last few years. In recent years, utilities have become much simpler, selling or spinning off units that are more risky or less relevant than regulated monopolies.

Exelon,

For example, earlier this year, we spun off a business unit exposed to the highly competitive electricity market.

CMS Energy

Last year, it sold its bank subsidiary.

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Still, the recovery in this sector is something unusual given the macroeconomic environment. Utility stocks tend to be unable to respond well to rising interest rates for two reasons: According to S & P Global Market Intelligence. Second, they are bond substitutes. As interest rates rise, utility dividend yields begin to become less attractive than government bonds. At some point during the recession in early 2020, utility stock dividend yields were about 4 percentage points higher than 10-year government bond yields. Its edge is currently only 0.17 percentage points.

In addition, high inflation tends to be bad news for utilities. As inflation begins to push up the overall cost of households, it becomes difficult to convince utility regulators to grant higher tariffs. The impact of emotions urging politicians to blame companies ranging from oil producers to supermarket chains for causing consumer distress, as regulators are usually appointed or elected by the governor. I will not receive it.

Credit Suisse equity analyst Nicholas Campanella said on return on equity: “Price caps put pressure on companies’ ability to invest and earn full ROE, as seen abroad, such as in the United Kingdom. I am. ” He added that such movements still seem unlikely in the United States, but they are worth watching. However, at this point, concerns about the devastating effects of inflation on fixed income investments may have overturned other inflation issues.

“At least in utilities, we have more sources of income, and in an inflationary environment, we think the utility’s revenue stream is better than the bond stream,” Rhame said.

The question is how much these trends are squeezed by high interest rates and inflation. In addition, industry-specific clouds are approaching this sector. Lost momentum In Congress about what is widely known as the BuildBackBetter package, which includes incentives for clean energy. The latest obstacle is a US Department of Commerce survey on whether Chinese solar companies are avoiding it. Solar charges— Developments that can significantly delay new solar buildout plans. Delays in spending plans can slow revenue growth, as most utilities revenue is based on the amount spent on the grid.

Investors seem to be finding new concerns in every corner these days, and the forces holding back the rest of the market make utilities look like hidden gems at one moment and the next. Can look like an expensive lump of coal. But in the softening stock market, these power lines are beginning to appear to grow.

Write to Lee Jinju jinjoo.lee@wsj.com

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How Utility Stocks Maintained Sparks

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