Key services
Companies acting as producers and distributors of essential services such as electricity, gas, sewage and water fall into the utilities sectors.
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Companies in the utilities sector provide homes and businesses with essential services such as electricity, gas or water. These firms can usually receive predictable earnings due to providing key services and goods that are in constant demand by consumers, even during market downturns. They can be a good choice for investors looking for defensive stocks, which refer to equities whose prices are considered to be relatively stable and less affected by changes in general economic conditions.
However, utility businesses are unlikely to give the same capital returns as companies oriented on future growth. Investors interested in capital gains might look to other sectors, such as technology shares instead. Those considering investing in utility companies should also keep in mind that they are strictly regulated and shifts in government policies can affect their operations. Infrastructure can also be expensive to build and maintain, resulting in many utility firms taking on large debts that can be sensitive to interest rate changes.
NextEra Energy ($NEE)
NextEra Energy is one of the largest electric utility companies in the U.S. due to its ownership of the Florida Power & Light Company and provides around 12 million people with power across the state. The business generates energy from solar, wind and nuclear sources, as well as having battery storage and gas pipeline infrastructure across the nation. New investments are expected to be the firm’s biggest driver of growth.
The stock can be well suited for investors with a buy and hold strategy, as NextEra’s projects tend to be long-term ventures. For example, they have a ten year plan to expand solar projects with 20,000 megawatts of capacity. Compared to Q4 2023, net income and earnings per share (EPS) dipped in Q4 2023, falling from US$1.52b to US$1.21b and from U$0.76 to US$0.52 respectively. On the other hand, full year results for 2023 saw earnings reach US$7.31b and an EPS of US$3.60 per share, indicating growth over the US$4.14b earning and EPS of US$2.10 in 2022.
Southern Company ($SO)
The Southern Company operates in the electricity and natural gas distribution space to serve nine million customers across several states. The company also owns a fibre optics network and telecommunications services. The stock should interest investors focused on dividends, as the firm has a history of increasing annual payouts and the latest quarterly dividend will be 70 cents per share. The company’s energy mix at Q3 2023 consisted of 52% from natural gas, 17% from coal, 16% nuclear and 15% renewables.
In 2023 Southern brought the first new nuclear power unit on line in the U.S. in over 30 years, although recovering costs for the project will take time and further delays in construction of the next unit could worsen the impact on their balance sheet. The regulations and subsidies in the Inflation Reduction Act will affect the plans of companies in the utilities sector, as it intends to promote a shift away from fossil fuels. However, investors should keep in mind that these rules may change and the U.S. presidential elections in late 2024 could bring considerable change to the sector.
Essential Utilities ($WTRG)
Essential Utilities provides water, wastewater services and natural gas to around 5 million customers in nine states. Investors interested in gaining exposure to water could be interested in the business, as its regulated water segment was the largest revenue earner in Q3 2023 with US$310.6m, ahead of the natural gas unit that brought in US$94.8m. Investors should keep in mind that outside factors can impact the firm’s operations, such as their operations benefitted from lower gas prices in the latest quarter and weather conditions being unpredictable.
Essential Utilities works in a strongly regulated sector and views acquisitions as a source of growth. They’re quite dependent on the state of Pennsylvania, which accounts for just under half of their water and almost all of their gas customers. Maintenance activities are responsible for a large portion of their budget, with upgrading, expanding and replacing infrastructure estimated to require an investment of US$1.10b in 2023. The company also expects to spend at least US$350m to clean up ‘forever chemicals’ from its water systems over the next few years.
Choosing contracts
There are several ETF options for investors who want to invest in the utilities sector generally, rather than looking for a specific stock. For those wanting to gain exposure to the firms in the U.S. that supply electricity, gas and water to homes and businesses, the Utilities Vanguard ($VPU) comes with a fee of 0.10%. Another option from iShares, the U.S. Utilities Shares ($IDU) ETF, has similar holdings, but has a fee of 0.40% if investors are conscious of these types of costs. Both these ETFs have over 50% of their holdings involved with electricity as at December 2023. The Utilities Select Sector SPDR ($XLU) also has a fee of 0.10% and focuses on firms in the S&P 500 index. These ETFs do not have significant numbers of holdings and if investors are concerned about the results of a single firm, they can consider the Invesco S&P 500 Equal Weights Utilities ETF ($RSPU) instead. The weighting of its holdings are adjusted to all be equal, rather than reflect their size by market cap. For investors interested in global utility firms, the Global Utilities iShares ($JXI) provides exposure to the 65 stocks in the S&P Global 1200 Utilities Index.
