The consensus thought, which is often wrong, on Wall Street is that utility stocks will perform rotten in a rising rate environment. Add in a very weak 2015, when the utility index was down 8%, and the naysayers seem confident 2016 will be lousy as well. The reality is that there may not even be an interest rate hike in 2016 if the economy doesn’t show some life, and even if there is, it could be limited to 25 basis points, or one-quarter of 1%.
A recent research note from Baird makes the case that, while utilities substantially underperformed in 2015, citing slowing investment in generation and evolving environmental policies, the top stocks in their coverage universe could have solid total return potential for 2016 with a much lower risk profile, which may resonate with investors as we are starting off the year with a deep sell-off. With that in mind, they do say that stock selection is critical as the days of everything in the sector trading higher are over.
They have five stocks that are considered core holdings. We screened for the stocks rated Outperform, and found four that also rank low in risk.
Alliant Energy
This company’s utility subsidiary, Wisconsin Power and Light Company, utilizes the trade name of Alliant Energy. Alliant Energy Corp. (NYSE: LNT) is based in Madison, Wis., and provides electric service to 465,000 customers and natural gas service to approximately 185,000 customers in more than 600 communities across central and southern Wisconsin.
Last year the company replaced about 700 megawatts of aging generation with a highly efficient natural gas facility, this project will play a large role in the modernization of the Wisconsin fleet and reflects the company’s continued commitment to environmentally responsible resources.
Shareholders are paid a 3.52% dividend. The Baird price target for the stock is $68. The Thomson/First Call consensus price target is $65.20. Shares ended last week at $62.45.
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CMS Energy
This stock offers a solid dividend and good upside potential. CMS Energy Corp. (NYSE: CMS) is Michigan-based and has an electric and natural gas utility as its primary business. It also owns and operates independent power generation businesses. Baird feels the stock should trade in line with peers, reflecting what the analysts view as above-average total prospects spurred on by an extensive pipeline of infrastructure investments supported by a constructive regulatory environment.
CMS investors receive a solid 3.22% divided. The Baird price target is $38, while the consensus target is $37.42. Shares closed most recently at $36.08.
WEC Energy
This is another steady performer for investors with good prospects for 2016. WEC Energy Group Inc. (NYSE: WEC), based in Milwaukee, is one of the nation’s premier energy companies, serving 4.4 million customers in Wisconsin, Illinois, Michigan and Minnesota. Its principal utilities are We Energies, Wisconsin Public Service, Peoples Gas, North Shore Gas, Michigan Gas Utilities and Minnesota Energy Resources. The company’s other major subsidiary, We Power, designs, builds and owns electric generating plants.
Investors cheered a recent 8.2% increase in the dividend, and the company will continue to target a dividend payout ratio of 65% to 70% of earnings, a policy in line with peers across the utility industry.
WEC investors are paid a 3.55% dividend. The $54 Baird price target is higher than the consensus target of $52.84. The shares closed last Thursday at $51.31.
Xcel Energy
Xcel Energy Inc. (NYSE: XEL) generates electricity using coal, nuclear, natural gas, hydro, solar, biomass, oil and refuse, and wind energy sources. It is also involved in the purchase, transportation, distribution and sale of natural gas. In addition, the company engages in developing and leasing natural gas pipelines, and storage and compression facilities, as well as investing in rental housing projects. It serves residential, commercial and industrial customers and public authorities in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin.
Baird sees possible upside to current forecasts that could stem from investment in natural gas supply and pipes. The firm also feels that the company trades with above-average earnings potential and in a very constructive regulatory environment.
Xcel shareholders are paid a very nice 3.6% dividend. Baird has a $38 price target, and the consensus target is $36.75. Shares closed Thursday at $35.91.
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While the big money made in utility stocks over the past five years is likely over, some of these top companies have seen significant price declines since this time last year. They still make good sense in a conservative growth and income portfolios.
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