It's barely June and I'm already terrified of opening my electric bill (yes...I still get SOME paper bills). Despite Elon Musk's Tony Stark-esque visions of taking America off of the electrical grid, for now, we still send a monthly check to our friendly, neighborhood power company. You'd think that with that type of dependable cash flow and the encroaching summer heat, electric utility stocks, mainly the large, regulated producers, would be on fire. Not so fast.
After a run to an all time high at the beginning of the year, the Dow Jones Utility Average (^DJU) has given up 10.5% since reaching that peak. What gives? Cautious, Main Street investors love the big utilities for their steady, dependable dividends. But whispers of the Federal Reserve raising rates have spooked stock prices.
Historically, electric utilities have relied heavily on public debt issuance. However, their strong, "set your watch to it" cash flow allows them to not only comfortably service debt, it also allows them the luxury of paying shareholders fat dividends. But whenever the market thinks interest rates are going to rise, interest rate sensitive stocks, like utilities, are almost always punished.
Are rates going higher? Probably. Eventually. Will a 25 basis point (bps) hike in the Fed Funds rate REALLY put the immediate squeeze on the borrowing costs of regulated power producers? I'm going to go out on a limb here: no. I examined this issue recently in another article.
This shortsightedness creates opportunity for long term, conservative investors seeking high quality stocks with well above average dividends. Here are three that fit the bill.
Southern Company (NYSE:SO) - One of the biggest power producers in the nation, Southern Company lights up the lion's share of the Southeastern U.S. The company operates with a rock solid balance sheet in a constructive regulatory environment. At around $43.67, the stock trades at nearly an 18% discount to its 52 week high and yields an attractive 4.96%.
Consolidated Edison (NYSE:ED) - Someone's gotta power the Big Apple and these are the guys who do it. Again, like their brethren to the south, ED carries a solid balance sheet, an A- credit rating, and works in a gigantic, electricity hungry footprint. The stock trades at about $61.71 which is almost a 15% discount to its 52 week high. The dividend yield is attractive as well at 4.2%.
Entergy Corp (NYSE:ETR) - While not in the same behemoth league as SO and ED, Entergy does serve 2.6 million customers across Louisiana, Texas and Arkansas which, despite flagging oil and gas prices, are, indeed participating in the nation's energy renaissance. At around $76.50, shares trade at close to a 17% discount to their 52 week high and yield an attractive 4.3%.
As a basket, these stocks trade at a 54% deeper discount to that of the DJ Utilities and yield nearly 4.5%; 104% more than a 10 year U.S. Treasury. Long term, income oriented investors should take advantage.
Disclosure: The author is long SO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also hold SO in family and client accounts