The S&P 500 is still holding onto about half its early 2023 gains. But like other dividend-paying stocks, utilities have gone into reverse this spring, with the Dow Jones Utility Average underwater by nearly 6 percent year-to-date. Here is why patient investors should capitalize with stocks like Vistra Energy (VST), advises Roger Conrad, editor of Conrad’s Utility Investor.

High inflation and rising interest rates are certainly playing a role in the underperformance. But a more important reason may be investors’ disappointment that last year’s Inflation Reduction Act didn’t spark a more robust industry response.

In retrospect, the warning shot was the negative reaction to otherwise quite robust Q4 results and guidance from NextEra Energy (NEE) back in late January. But there is a lot to like right now for patient investors.

The key with anything you buy in an environment of stubbornly high inflation and elevated recession and market risk is underlying business strength. With almost all Q4 and 2022 results in for the Utility Report Card coverage universe, well-run essential services companies are still thriving.

In the year ahead, even the most adept will face rising operating and borrowing costs. And we’ve already seen regulatory pushback to higher rates in some states.

But despite this, all of our portfolio companies continue to lay out guidance for another solid year of reliable earnings and dividend growth in 2023. That means their stocks are still worth owning.

One good example is VST. Not only did the Texas-based power generator and retailer beat guidance and boost dividends. But it announced the biggest utility sector merger so far in 2023, acquiring Energy Harbor Corp and its four nuclear power plants.

Despite the Biden Administration’s bias against consolidation, I expect more utility M&A this year, as a proven avenue for cutting costs. And the best candidates for high premium offers are always companies you’d want to own even if no deal ever happens.

Recommended Action: Buy VST.

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