0

The Safest Utility Stocks to Invest in Q4 2022

PUBLISHED Nov 27, 2022, 8:19:43 AM        SHARE

img
imgStaff Writer

The Safest Utility Stocks to Invest in Q4 2022

1). American Electric Power Company Inc (AEP)

2). American Water Works Company, Inc (AWK)

3). Duke Energy Corporation (DUK)

4). Artesian Resources Corporation (ARTNA)

5). NextEra Energy (NEE)

Dishonorable Mention - Dominion Energy, Inc (D)

AEP Generational Transformation

1). American Electric Power Company Inc (AEP)

  • Standard Deviation: 1.47%
  • Max Drawdown: -32.91%
  • Dividend Policy: 60% to 70% Dividend Payout Ratio

AEP is rated the best electric company stock for Q4 2022 so its no surprised it landed at the top spot of the safest utility stocks to invest in. Its low volatility and low drawdown make it a great stock to pick up if you’re an income investor. AEP has shown discipline by keeping its dividend payout ratio near 60%. This consistency has translated into 10 years of consistent dividend increases.

AEP Transforming Their Fleet

Source: AEP 2022 Factbook

AEP has reduced their reliance on fossil fuels and increased their fleet of renewable energy. AEP focuses on the environmental impact of when discussing renewable energy. But this business transition, possibly, may also have the positive side effect of eliminating their exposure to the volatile energy sector.

Utilities generally pass the costs of energy to businesses and consumers. This gives them a steady rate of return regardless of the price of oil. But changing energy prices can have detrimental effects on a businesses cashflow. The utility passes the cost of energy to the customer, but this doesn’t happen immediately. The utility company has purchased the energy months ago prior to you enjoying the output of that energy.
By moving to renewables, AEP’s costs are more predictable, which gives them steady cashflow as well.

AWK, Earnings Growth Outlook

Source: American Water Works Q3 2022 Presentation

2). American Water Works Company, Inc (AWK)

  • Standard Deviation: 1.65%
  • Max Drawdown: -31.16%
  • Dividend Policy: 55% to 60%

Oh really? Our top rated water utility stock happens to be the second safest stock as well? Really? Its true, our rating system for water and electric stocks used volatility as a criteria. Volatility took up 2 of the six spots in our best of ratings system. But a well-managed utility company really translates into a safe investment. Well managed utility companies diversify their operations and set realistic dividend policies. This has allowed AWK to raise its dividend for the last 10 years without interruption. American Water Works has also acquired Butler Area Sewer Authority (Pennsylvania), which was signed October 11, 2022

Leadership expects acquisitions will grow earnings by 1.5% to 2.5% thru 2023. Besides higher interest rates impacting their debt, they are also concerned about the growing costs of chemicals.

Duke Energy Natural Gas Power Plant

Source: news.duke-energy.com

3). Duke Energy Corporation (DUK)

  • Standard Deviation: 1.50%
  • Max Drawdown: -37.37
  • Dividend Policy: 65% to 75%

Duke Energy has a dividend policy that skews higher than the typical top tier utility. But Duke Energy still deserves to be on the top list of safest utility stocks. The company has reliably grown its dividend over the past decade without a single dividend cut.
Duke Energy is trying to build its renewable energy sources, but as of 2021[2], renewable energy make up 8% of their portfolio. They also have exposure to natural gas distribution thru their subsidiaries Piedmont Natural Gas and Duke Energy Ohio. Even with this high exposure to the energy markets, Duke Energy has continued to be low volatility stock with continued growth in its stock over the last 5 years.

4). Artesian Resources Corporation (ARTNA)

  • Standard Deviation: 1.78%
  • Max Drawdown: -26.77%
  • Dividend Policy: 55%

Artesian Resources provides a stable water utility service along with a growing wastewater treatment business. The company provided 8.4 billion gallons of water in 2022 and has 73 treatment facilities. There water treatment business continues to expand as they acquired Tidewater Environmental Services in early 2022[3].

NEE Financial Expectations

5). NextEra Energy (NEE)

  • Standard Deviation: 1.67%
  • Max Drawdown: -35.63%
  • Dividend Policy: 60%

NextEra Energy provides electricity to Florida. Thanks to Florida’s continued population and economic growth, NextEra has seen a consistent growth in customers and revenue. Most of their projected EPS increase looks to be from capital reinvestment instead of acquisitions. In fact, they look quite confident in their EPS forecast growth thru 2025.

Source: NextEra Investor Relations

Dishonorable Mention - Dominion Energy, Inc (D)

Dominion Energy has been a “low volatility” stock over the last 5-years; however, recent turbulence forced Dominion Energy to cut its dividend in Q4 2020. Add to investor concerns over its recent price correction and Dominion Energy is just a safe investment in 2022. One telling sign that Dominion Energy was risky is that its dividend policy is not existent. Instead, leadership had hoped to grow its dividend 6% per year[4]. Typically, leadership will tie dividend policy to a dividend ratio instead of a growth rate. Since, 2020, Dominions dividend is back to growing again, but still hasn’t reach its pre-2020 levels. To learn more about why Dominion Energy is falling see:

Are Utility Stocks Safe?

The data does not lie. The utility sector is the safest sector of all the stock sectors, but it is not a safe sector to invest in. In past 5 years, the top electric and water utility companies saw a draw down of 35% to 55%!
Let’s use an objective measure of safety and uncertainty to see if utilities really are a “safe” investment. Taking the following definitions from brokerage firm Charles Schwab[1]

A market correction is when a stock index falls more than 10% from a recent high A bear market is when the market falls by more than 20%

By these measures, utility stocks cannot protect you from a market correction, or even a bear market. Utilities are too aligned with the broader market.
But this analysis is stuck assessing a tree when we are missing the larger forest. The top five utility stocks have consistently increased dividends for at least the last decade. Some of these companies have been increasing their dividends for 25 years, while others have increased their dividends for 100 years!

These utilities have a conservative dividend policy. This policy mean that earnings have continued increasing, which means the utility’s stock price must have increased. The takeaway is that a utility stock is a safe investment in the long term but it will not protect you from short-term market risks.

Why are Utilities a Safe Investment?

Most utilities are a safe investment in the long-term. The key reasons come down to:

  • Off-loading energy price risk to the consumer
  • Diversifying into renewable energy
  • Having a monopoly or oligopoly
  • High capital expenditures create large moats
  • Need for credit forces consistent business practices

How we Define “Safest” Investment?

Drawdown

Drawdown is the worse-case loss a stock fell during a given time interval. It’s the difference from a local high price all the way down to a local low price. This metric matters to long term investors because this worse-case scenario will be felt by the investor as they hold through this drawdown. Large drawdowns occur due to leadership mismanagement (missing earnings or unprepared for future risks) or over speculation. For utilities, speculation should not be a factor as leadership should be giving clear guidance on its business. Results should be very close to leadership forecasts due to the stability of the utility sector. Still, utilities are not immune to market corrections. When the overall market falls, this can drag the utility sector down regardless of company’s prospects.

Volatility

We measure the volatility of a stock by taking the standard deviation of the stock’s daily price movements. This calculation is best known for being the denominator of the Sharpe ratio. In this case, we are more interested in the safety of a stock. Because performance isn’t a major factor in the safety of an investment, we didn’t use the Sharpe ratio and instead used the standard deviation.

Dividend Cuts

If a utility cuts its dividend, its management was either unprepared for business turbulence, or they are simply mismanaging the company. A board of directors will typically avoid cutting dividends, even if leadership has found a growth opportunity to fund. Utilities are slow moving businesses, so the company shouldn’t need to slash dividends so suddenly for business opportunities. Typically, dividend cuts are a sign of business problems and a sign that the utility stock is unsafe.

Dividend Policy

We’ve seen in our article, What are the Dividend Policies of the Top Utility Stocks that the top utility companies have a declared dividend policy somewhere in their investor relations media. This policy is based on a payout ratio of dividends as a percentage of earnings. And this payout ratio is 60% to 65% for the best utility stocks.
It's no surprise that the top stocks have a disciplined approach to deciding their dividend. Setting a balanced target that benefits both investors and the business helps set expectations for both stakeholders. Always be sure to research the dividend policy for your utility stock. It is an important check market when deciding on investing in a utility stock.

The Bottom Line

  • Utility stocks have had significant drawdowns of 35% to 55% in the last five years. Utility stocks are not guaranteed safe investments in the short term.
  • Utility stocks, especially the safe ones on this list, have stable long-term growth and are safe long-term investments, if you do the proper research and choose the right utility stocks
  • Utilities are large moat monopolies or oligopolies that pass the risk of energy prices to their customers. This is why they are safe long-term investments.

    References

1). https://www.schwab.com/learn/story/market-correction-what-does-it-mean

2). Duke Energy 2021 Annual Report

3). ARTESIAN WASTEWATER MANAGEMENT, INC. ANNOUNCES CLOSING ON ITS ACQUISITION OF TIDEWATER ENVIRONMENTAL SERVICES, INC.

4). Dominion Energy Annual Meeting May 2022

DUK, Buy

Duke Energy Corp.
Return: -3.94%

DUK, Buy

Return: -3.94%


Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
Confirmation of a Breakout (?)
Image

Stock Market Commentary

STOP Making Extra Mortgage Payments on Your LOW Rate Mortgage
Image

If you obtained a mortgage at any point from 2010 through early 2022, there is a good chance your mortgage rate is at or below 4.50%.

Market Musing 11-22-2022, Mild Thanksgiving Week?
Image

High Volatility: VIX > 22. The SPX is trading in tight range this Thanksgiving week.

7 High Return-of-Capital REITs
Image

Real Estate Investment Trusts (i.e., “REITs”) are tax-advantaged income vehicles that have become increasingly popular with investors and institutions in recent years.

What do Bookkeepers do Daily?
Image

You would think that what a bookkeeper did was straightforward. But bookkeeping is about organizing business chaos and creating a summary of a company’s financial life.

FTX Crashes: Everything You Need to Know
Image

Ever wanted to know what the FTX crash is all about? Find out in this article.

November 2022 Stock Considerations
Image

With a new trading month already in full swing it is time, once again, to highlight some of my potential stock purchases.

How is your Retirement Plan?
Image

Retirement Accounts, Retirement Planning, and what your purpose means in retirement

Watching & Waiting
Image

Stock Market Commentary

How To Save Money Fast – 26 Easy Tips
Image

We all know it’s important to save money. But how do you do that when inflation is up, mortgage rates have increased, and rents are rising? Oh, and don’t forget – extra spending is coming with the holidays around the corner. Yet even in tough times, there are strategies to help build savings fast.

Here Are The Requirements For A Hard Money Loan
Image

Hard money loans are one of the more popular options for buying fixer-upper homes to renovate and resell for a profit. While there are alternatives available – such as using a traditional or renovation mortgage – hard money loans usually fund far faster and are less restrictive. If you’re considering a hard money loan for an investment property purchase, here’s a look at what hard money loans are and the typical requirements for a hard money loan.

Unstable Value Funds (VI)
Image

Well, the last installment in this series was 2009. I ran a Guaranteed Investment Contract [GIC] desk at Provident Mutual from 1992-1997. I also managed our internal stable value funds for our pension line of business. This was during a period where increasingly Stable Value Funds were being replaced by bonds and bond funds being wrapped by a type of derivative that would allow for “benefit responsive payments,” called a “wrap contract.”

What is a dividend trap, and how do you avoid it?
Image

With recent declines in stock prices, dividend traps are becoming more prevalent. In this blog post I'll describe what is a dividend trap, it's potential downfalls, and how to avoid these traps. Before we begin, you need to understand dividend yield, and the dividend payout ratio.

Margin call What is it ?~No.1 Beginners Guide
Image

For starters this happens from time to time. Today we address the no.1 cause of sleepless nights for most newbie traders risking their hard earned money in the markets especially when it comes to a margin call what is it and how can you avoid it?

Why I’m Fascinated With Dividend Investing
Image

I’ve been fascinated with dividend investing for many years. It goes back long before I started my journey to financial independence and early retirement. It seems so simple. You buy a company stock that is stable and has dividend history on their side. A stock that figures for a potential future of continued business with dividend and stock growth.

6 Investing Lessons from Our Honeymoon’s Terrible Start
Image

We had a terrible start to our honeymoon. Bad luck and human incompetence torpedoed our first travel day. Naturally, I took it as an investing lesson. Our itinerary was Rochester –> Boston –> Tokyo –> Hanoi. Then after a few days in Hanoi, onward to Chiang Mai, Bangkok, and other parts of Thailand. But things went poorly from the start.

WHAT PARENTS NEED TO KNOW ABOUT HELPING TEENS BUDGET
Image

​Many teens think they know almost everything – that is until they have to experience adulthood for themselves. Parents of adult children will likely tell you that when their children were teens they, as parents, “knew nothing,” but when the magic of adulthood came around, everything changed. Your teens may even think they know how to budget. As a parent, however, you know that it’s not always easy to make and stick to a budget. So how do you teach teens about budgeting? At Wealthy Habits, our goal is to make the conversation easier and a lot more fun for both parents and teens. Here are three tips we share in our online parent webinar, How to Teach Your Kids About Budgeting.

Budgeting on a Single Income
Image

According to a 2017 report in Market Watch, half of American households are living paycheck to paycheck, and about 49% of Americans worry about their financial well being. Living on a single income only amplifies the stress and worry about finances. Having a plan, maintaining fidelity to it, and re-evaluating that plan can all help minimize the stress and allow you to have control over your expenses and your future.

US Economic Growth Expected To Continue In Q4
Image

The recovery in US economic activity in the third quarter appears set to continue in Q4, based on the median for a set of estimates compiled by CapitalSpectator.com. Although the numbers point to a slowdown in growth, the current Q4 nowcast highlights the possibility that output will post back-to-back quarterly increases for the first time this year

Resources for Publishers
Resources for New Investors