Utilities Week In Review For March 5-9

Summary

• It appears the bond sell-off has stabilized for now.
• Utilities continue to underperform other sectors.
• XLU continues to consolidate after the sharp sell-off that started in mid-December.

The best news for the utility sector is that the recent increase in interest rates may be topping out.

The 10-year yield continues to hover around 2.9%. On Friday, I thought the employment report would lead the market to conclude that four rate hikes were now possible, which would lead to a broader bond market sell-off. While the possibility of four hikes has increased, 10-year yields have remained calm.

In fact, the yield curve has come in slightly this week:

And corporate yields have also stabilized a bit:

The Baa area of the market widened a bit this week, but the move was small compared to the recent widening. The Aaa market is stable.

The utility sector remains out of favor:

It is clearly lagging compared to other sectors.

Most of the 10 largest members of XLU advanced last week:

Sempra (SRE) had the largest gain, rising 1.86% (I reviewed its latest 10-K earlier this week). Exelon (EXC) had the next strongest gain (here's a review of its latest annual report). The only two issues to move lower were Public Service Enterprise Group (PEG) and Southern Company (here's its annual review).

Let's turn to the XLUs, starting with their two-week chart:

Prices have been consolidating in a symmetrical triangle pattern. While this is frustrating for bulls, it's actually a very healthy development. The XLUs sold off sharply over the last few months. Long periods of consolidation indicate that buyers and sellers are sorting through price signals over a longer period, allowing them to "catch their breath."

On the 30-day chart, we see additional consolidation, but this time between 48.6 and 50.6. As I noted above, this is a healthy development, especially after a sell-off.

Finally, we have the daily chart:

This chart shows the depth of the sell-off that started in mid-December. On an absolute basis, prices fell about 16%, which is a large move for a conservative, income-oriented sector. Since bottoming, prices have broken through resistance but rather than rallying higher, they are consolidating their gains for now. But the rising MACD is a positive sign.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[CompoundingDollaz]

Great charts! Thanks for the article... Looking to nibble at the cream of the crop, NEE - at a lower price, but in the meantime, adding to SO and D, as well as SRE and XEL.

We're buying the stable income, right? These are not going to be cap appreciation plays for the most part, save NEE.

[petektf]

Then why not buy an income fund with better yields? If you just want the income and not cap appre?

[CompoundingDollaz]

such as? a highly levered CEF that's getting crushed due to the rates rising or one that is loaded with REIT's which are getting slaughtered?

I've already diversified quite nicely with about 70 securities in the stable.

[petektf]

dnp? utg?

[labman106]

Thanks for the update. Ute ETFs have been increasing ever so slowly. Utility corporations will be around for the next 80 years+ moving from coal to gas to solar and wind, etc. Even the "greenies" have to recharge their cell phones some how and will need to recharge their EVs.
Utes are a dividend vehicle for most investors. Total return is secondary.

[Riskman]

I can't understand why PPL is doing so overly poorly...not only raised it divy recently, their electrical generation are non-nuclear, very good balance sheet, they have a great reputation in the PJM system region and I do not buy their UK diversification is the main reason. My avg buy is $30.35. Just because of interest rates slightly rising?

[InvestRite#1]

Riskman, PPL's earnings growth has tanked, their debt has risen to just about double their equity, and their P/O Ratio is at 96% as I write this. And still Bill Spence CEO takes $15.5Mil as a salary, that's 5x what the President Dudkin makes. Its better long term, but don't expect much dividend growth this year, 3.8% maybe spread out, and if it drops further, the CAGR will feel like a drag on your portfolio.
Spence needs to pay debt down seriously

[User 48639878]

InvestRite#1, PPL’s payout ration will go down substantially in 2018.
PPL Earnings Guidance:
PPL Corp. expects 2018 adjusted earnings to be in the range of $2.20-$2.40 per share. The company also provided compound earnings growth guidance of 5-6% from 2018 through 2020 with 2017 as the base. PPL is paying out $1.64 for the next year, even if you take the lowest projected earnings of $2.20, the P/O ratio is 74.5% and IF they are able to earn $2.40 at the high end the P/O ratio is 68.33%. Hope that helps, Nomad

[Riskman]

Thank you!

[Chuckx]

I'm keeping my powder dry on utes, they're weak and very droopy. March 9 jobs report was "goldilocks" because wages fell. Wage growth has been unnaturally low for a long time, no telling how long the lid can stay on, but it feels like something has to give.

Utes are basing near lows, rates are basing at tops. I don't take much comfort from that two week triangle in XLU.

[InvestRite#1]

Looks like the same thing happened a year ago, then a fairly strong rise through mid June, mid September, and then finally through end of December. Consolidation this time around may not play out the same way. The rates rising, will keep any upward moves checked, if Powell has anything to say about this.
Those of us who hold these may be in for more CAGR's of minimum consequence. But it may also be a period when we will be watching for the right time to enter more and new positions. While the dovish hawk Powell, will be moving the throttle gently, he will nonetheless still be moving it upward.
Thanks for the charts Hale

[Gridbird]

Thanks for article, Hale. I would like to enter water utilities and have been monitoring for 2 years running now. I may be dead before this sub sector ever hits my comfort buying zone. Probably should just start nibbling in tiny amounts and quit complaining about their chronically high prices despite the recent sell off.

[CompoundingDollaz]

NWN has the record for paying the most consecutive years, of increasing dividends. They were a traditional gas company but are now divesting into water utilities/services.

[Gridbird]

Affinity, that one has not been on my radar...What percentage of the company is water utility based now, by chance if you would happen to know?

[CompoundingDollaz]

They just have started with their initiative of acquiring water utilities, so currently, it appears to be 1% of their overall business according to the latest presentation they released with earnings.

I'm not long NWN, but have them in the "considering" category. I'm very loyal to the Dividend King list members for the most part, but some are of no interest to me.

62 years is however, an amazing streak dividend payout growth streak they are proud of.

[dunnhaupt]

Utilities moving lower means dividends moving higher. Now may be a good time to lock in those higher dividends.

[riddix]

PPL just hit 6%, that coupled with 3-4% div growth is a slam dunk for a utility.

[CompoundingDollaz]

If one can continue to sustain the destruction of capital... Far safer ute's for your money, such as NEE, D, and SRE.

[Jack Heller]

Thank you for the weekly reviews. Interesting to see how long they will be out of favor for. Will utilities stay at the same prices or drop lower remains to be seen. Might be a good time to open up a long term position here.

[Hale Stewart]

I'm glad you find it useful. It really helps me as well.