Fed up with turbulent stock markets? So are we all. Unfortunately, it looks like we will have to live with them for a while, cautions Gordon Pape, a Canadian stock specialist and editor of The Income Investor.
But there are ways to limit any losses. A few sectors of the market are holding their own or close to it, even in these turbulent times. Let’s look at utilities.
The S&P/TSX Capped Utilities Index was showing a loss of 5.58% year-over-year, as of Oct. 7. That was 3.4 percentage points better than the S&P/TSX Composite Index. The difference in the US was even more dramatic. The S&P 500 Utilities Index dropped only 2.36% in the past year while the S&P 500 itself was down 17.28%. That’s a swing of almost 15 percentage points.
This doesn’t mean utilities are exempt from market turmoil. Rising interest rates have had a negative effect on the share prices of these capital-intensive companies. Many are trading at the low end of their 52-week range. But the converse of lower share prices is higher yields, which creates an opportunity for income investors.
Utilities can outperform a falling market for several reasons. For starters, they are somewhat recession proof. Whatever happens in the economy, we still need to keep the lights on and our homes warm. Second, much of their income is regulated (rates set by government agencies). That makes revenue reasonably predictable.
Demand may decline in a recession but normally not to a degree that materially affects the bottom line or threatens dividends. Finally, their share prices are supported by steady dividends, which are increased on an annual basis.
Three of our recommended utilities recently announced dividend hikes. Here are updates on each of them:
Fortis (FTS) is an electricity and natural gas distribution utility based in St. John’s. It has total assets of about $60 billion and generated revenue of $9.4 billion in 2021. The company serves utility customers in five Canadian provinces, nine US states, and three Caribbean countries.
In late September, the company announced a 5.6% increase in the quarterly dividend to $0.565 per share ($2.26 a year), effective with the Dec. 1 payment. It marks the 49th consecutive year that Fortis has increased its payout. The shares yield 4.4% at the current price.
On July 28, Fortis reported second quarter results. Net earnings attributable to shareholders were $253 million ($0.57 per share), up from $0.55 per share in the second quarter of 2021.
On a year-to-date basis, net earnings were $634 million ($1.33 per share), an increase of $26 million ($0.03 per share) compared to the same period in 2021. The stock trades in a range between $50 and $65, Right now it is close to the bottom of its 52-week high/low points.
Emera Inc. (Toronto: EMA) (EMRAF) is based in Halifax. Its business is primarily in regulated electricity generation and electricity and gas transmission and distribution. Emera has investments throughout North America, and in four Caribbean countries.
On Sept. 22, the company announced a dividend increase of 4.15%, to $0.69 per quarter ($2.76 per year). The shares yield 5.2% at the new rate. Emera advised investors to expect annual dividend hikes in the range of 4-5% through 2025.
Earlier, the company released second quarter results which showed a 9% increase in adjusted earnings per share (EPS) to $0.59 compared to $0.54 in the same period of 2021. Year-to-date, adjusted EPS was up 1% to $1.51 compared to $1.49 the year before.
Edmonton-based Capital Power (Toronto: CPX) has 28 operating facilities across the US and Canada, driven by clean energy sources such as wind, solar, and thermal. Its total production capacity is 7,400 MW.
The company reported a strong second quarter, with net income attributable to shareholders of $80 million ($0.59 per diluted share) compared to only $20 million ($0.05 per share) the year before. For the first half of fiscal 2022, Capital Power had net income of $202 million ($1.55 per diluted share) compared to $123 million ($0.87 per share) in the prior year.
The company announced a dividend increase of 5.9% to $0.58 per quarter ($2.32 per year), effective with the Oct. 31 payment. The stock yields 4.9% at the current price.
