It’s Bad Times For Wall Street
The S&P 500 (SPY) is entering the bear-market territory. The coronavirus is spreading globally. Companies like Carnival Corporation (CCL) are suspending operations. An economic slowdown is here. The risk of recession grows daily. And on and on. I think it is without a doubt that we’ve hit a very bad time for Wall Street. Earnings, the fundamental driver of market mechanics, are going to be bad this year.
But that doesn’t mean it is bad times for everyone. As the old adage goes, when it’s bad times on Wall Street its good times on Main Street. Based on all the data, it is good times on Main Street. The level of employment is at record highs, wages are rising, labor markets are tight, and consumer confidence is high.
The virus, it’s a scare, but one most of us think will blow over sooner or later. Until then we are preparing to hunker down in our homes, work remotely when we can, and take some sanitizer everywhere we go. In this environment, some types of businesses are going to take a blow. For Carnival, this means the loss of two month’s revenue not counting whatever cancellations the company has already received. For others, like the Utility Sector, it means business as usual, just like always.
This Is When It Pays To Have A Captive Audience
The Utility Sector is not a fun sector. Its business is very predictable, there is very little competition, customer growth is slow, rates are regulated, and revenue certain. All qualities that can be attributed to its “real assets” status and safe-have appeal. When times are bad for Wall Street, investors tend to flock to these stocks for their guaranteed income and higher than average dividends.
The Utility Sector SPDR (XLU) yields close to 3.7% as of today’s new lows but you can find much better on a stock by stock basis. Within the XLU portfolio itself, three of the top four holdings yield better than 4.5% as of today’s sell-off. And those payouts are safe. Looking forward, companies like Duke are expected to see steady revenue growth in the range of 3.0% over the next two years.
The viral-induced market selloff is an opportunity for investors to buy stocks at the deepest discounts in over a year. The XLU is trading about -22% below its recent peak and may head lower but maybe not. Today's action looks bad but there are signs of buying in this high-yield virus-proof sector.
Duke, The Flexibility To Grow
Analyst Michael Weinstein at Credit Suisse upgraded his position on Duke (DUK) based on the company’s financial flexibility. Last year’s decision to put aside $2.5 billion to cover contingencies with the Atlantic Coast Pipeline project allows for additional accretive growth this year. He also cited higher rate-base growth across the utilities operating regions when raising his EPS target.
Shares of Duke are trading at their lowest levels in over a year and offering a chance at picking up this stock with a 4.5% yield. The payout ratio is a bit high, near 70%, but the growth outlook and balance sheet offset that worry. Duke is also a dividend grower so there is a chance for future increases. Price action suggest bargain hunters are out in earnest so today’s low prices may not last long.
Dominion Energy, The High Yield Option
Dominion Energy (D) just came off a year of explosive YOY growth. Growth was seen across the utility’s operations in the 4th quarter but natural gas storage and delivery stand out. With these segments in the range of 40% each, it is too bad they aren’t a larger portion of the business. Even so, Dominion is looking at system revenue growth in the range of 10% in 2020 and then 3% in 2021 as the impact of investment dollars levels off.
Dominion Energy stands out in this last as the high-yield option in a field of great dividend payers. With today’s sell-off the stock is paying over 5.0% and it is a relatively safe distribution. The payout ratio is high at 85% of 2020 consensus but that can be attributed to an aggressive history of increases. Dominion has been increasing for 16 years with a high double-digit CAGR. Investors looking to get into this should consider the possibility dividend growth will slow this year.
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