Fed to Keep Rates Unchanged: 4 Utility Stocks to Benefit

The Federal Reserve has decided to keep the federal funds rate unchanged at 0-0.25%. The basic objective of keeping the rate low is to support the U.S. economy. The novel coronavirus outbreak has drastically lowered economic activities, primarily due to lockdowns and stay-at-home directives.

Fear of uncertainty associated with the pandemic has created panic, and shutdown of industrial and commercial activities has lowered demand, with millions of Americans filing for unemployment benefits. However, economic activities have gradually started again. The Federal Reserve intends to keep the rates unchanged till 2022 to ensure credit to households and businesses, and promote an increase in economic activities, with a vision of creating jobs and bringing down the total number of unemployed.

The domestic-focused, regulated and capital-intensive utilities tend to benefit when interest rates are low as it lowers the cost of capital. The low rate enables utilities to source funds at a cheaper rate, continue with infrastructure upgrades and pay out regular dividends to shareholders.

Amid turmoil in domestic and global markets, it is advisable to stay invested in domestic-focused utilities, which are often considered as alternative to bonds for their steady returns. Moreover, demand for utility services doesn’t fluctuate too much, even in weak economic conditions. Coronavirus-led decline in demand from commercial and industrial customers were marginally offset by higher demand from the residential group. The U.S. Energy Information Administration expects electricity demand to improve 1% in 2021 after dropping 5.7% in 2020 from the 2019 level.

Utilities keep on upgrading their existing infrastructure to meet higher demand and provide reliable service to customers. At times when internal sources of funding were insufficient, utilities had to borrow the same from the market to continue with costly long-term projects. The low rate allows utilities to avail cheap funding and refinance high-cost debt with low-cost debt. Moreover, the continuation of utility capital projects will assist in the creation of new jobs, which are quite essential to bring the economy back on track.

Our Utility Picks

Per the proprietary Zacks Style Scores, stocks with the combination of a VGM Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer solid investment opportunities. We have selected four stocks from the Zacks Utilities sector based on the aforesaid criteria.

Price Performance (Three Months)

Vistra Energy VST, which currently carries a Zacks Rank #2, delivered positive earnings surprise of 5.6% in the last four quarters. It has a VGM Score of A and long-term (three to five years) estimated earnings growth of 11.9%. Its dividend yield is 2.55% and return on equity (TTM) is 10.84%, better than its sector’s 9.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for 2020 earnings has moved up 7.6% in the past 90 days.

Sempra Energy SRE, which currently carries a Zacks Rank #2, delivered positive earnings surprise of 11% in the last four quarters. It has a VGM Score of B and long-term expected earnings growth of 7%. Its dividend yield is 3.21% and return on equity (TTM) is 11.3%.

The Zacks Consensus Estimate for 2020 earnings has moved up 2.4% in the past 90 days.

National Fuel Gas Company NFG, which currently carries a Zacks Rank #2, delivered positive earnings surprise of 5.2% in the last four quarters. It has a VGM Score of B. Its dividend yield is 3.94% and return on equity (TTM) is 13.13%

The Zacks Consensus Estimate for 2020 earnings has moved up 2.1% in the past 90 days.

CenterPoint Energy CNP, which currently carries a Zacks Rank #2, delivered positive earnings surprise of 18% in the last four quarters. It has a VGM Score of B and long-term projected earnings growth of 5%. Its dividend yield is 3.22% and return on equity (TTM) is 15.75%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

Click to get this free report Sempra Energy (SRE) : Free Stock Analysis Report CenterPoint Energy, Inc. (CNP) : Free Stock Analysis Report National Fuel Gas Company (NFG) : Free Stock Analysis Report Vistra Energy Corp. (VST) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research