4 Utility Stocks Likely To Surpass Q4 Earnings Estimates

In the fourth quarter of 2017, U.S. GDP growth fell to 2.6% from the 3.2% growth that was achieved in the third quarter. Also, the unemployment rate remained static at 4.1%, the lowest in the last decade. The low unemployment level resulted in increased spending power and a rise in imports, which is partly responsible for the lower GDP growth.

The trend of growing stock indexes continued in the fourth quarter, but the utility sector failed to see similar growth levels; the S&P 500 gained 23.7% over the past year while the utility sector only rose by 4.5%.

Growth in the utility sector is presently lower than the GDP growth rate. Per the U.S. Energy Information Administration, reasons behind this trend include slowing population growth, market saturation of major electricity-using appliances, improving the efficiency of equipment and a shift in the economy toward a less energy-intensive industry.

The harsh winter weather that started during the Christmas Eve last year should show a positive impact on performance of the utilities. Utility companies need large amounts of capital to set up generation facilities, transmission and distribution infrastructure to perform during harsh climatic conditions and to combat hurricanes that affect their service territories. Upgrading and maintaining the existing infrastructure of natural gas and water service providers also involve a huge capital investment.

These capital-intensive utilities therefore routinely take recourse to capital markets to meet the requirements as internally generated funds are not sufficient. The Fed’s interest rate hikes in four of the last five quarters will certainly hurt utilities.

Having said that, investing in utilities is a safe bet due to the regulated nature of their business that gives their revenues a high level of certainty. Moreover, domestic orientation shields them from foreign currency translation headwinds. Utilities are also a preferred choice for income oriented investors as these increase shareholder value with regular dividend payments and share buybacks.

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