RBC Best Idea 2019 Utility Stocks for an Overbought and Overvalued Market

The fourth-quarter selling barrage that brought the S&P 500 to within touching distance of a bear market was reversed by some backpedaling by Jay Powell, the head of the Federal Reserve, who indicated that future rate hikes, if any, may be entirely data dependent. Regardless, on almost every metric the market is overbought and is probably due for a true bear market after an almost unprecedented nearly 10-year bull run.

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One of the best sectors to own when things get bad is utilities. Regardless of how the economy fares, nobody goes without electricity. RBC’s U.S. Best Ideas team, which covers utilities, is out with its top 2019 picks. The report noted this:

The electric utility sector, as represented by the Philadelphia Utility Index, arrived late to the party, but eventually surpassed the broader market in the later innings. The SPDRs Utility (XLU) was up 0.3% in 2018 (excluding the dividend) versus the S&P 500 index (SPX) down 7%. The performance also compares favorably with MLPs and REITs, as the Alerian MLP index (AMZ) was down 20.2% (mostly in line with the SPDRs Energy) and the MSCI US REIT index (RMZ) down 8.7%. The good relative 2018 performance followed a year during which utilities underperformed the SPX by nearly 1,100 basis points (bps).

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These five companies are RBC’s top picks, with two considered more defensive plays in the sector. All are rated Outperform.

Centerpoint Energy

RBC recently upgraded this top stock to Outperform. Centerpoint Energy Inc. (NYSE: CNP | CNP Price Prediction) is a diversified public utility holding company headquartered in Houston. Its utility segment provides electric distribution and transmission as well as natural gas distribution services to over 2.4 million electric and 3.4 million natural gas customers.

Besides its utility business, CenterPoint also consists of a competitive natural gas sales and services segment. Moreover, it currently holds 54% of outstanding shares of Enable Midstream Partners.

Investors receive a 3.89% dividend. RBC has raised its $29 price target for the stock to $34. The Wall Street consensus target is $30.15, and shares ended trading on Friday at $29.44.

Duke Energy

Duke Energy Corp. (NYSE: DUK) operates as a regulated U.S. utility company based in Charlotte, and it is a top defensive play at RBC. The company operates regulated electric utilities in the Midwest, Florida and the Carolinas and supplies electric service to approximately 7.5 million residential, commercial and industrial customers. Duke owns 50,000 megawatts of capacity.

The regulated gas utilities serve more than 1.6 million customers in the Carolinas and Ohio. A commercial arm owns contract renewables and pipelines across the United States.

Shareholders receive a 4.33% dividend. The $96 RBC price target compares with a prior $90 target and a consensus price target of $87.69. Shares closed Friday at $85.60.

Edison International

This top utility continues to raise its dividend on a steady basis but is somewhat riskier given the current issues at PG&E. Edison International (NYSE: EIX) is the parent holding company of Southern California Edison, which is an investor-owned public utility primarily engaged in supplying and delivering electricity in Los Angeles and southern California.

The company’s service area contains a population of 15 million people, and Southern California Edison serves the population through approximately 5 million customer accounts. It also holds the Edison Energy subsidiary, which is a nonregulated business that operates across a range of related industries.

Shareholders receive a 4.21% dividend. RBC has a $68 price objective, which is down from $72. The consensus target is at $65.73. The stock closed at $54.88 on Friday.

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NextEra Energy

With a very strong balance sheet, this company looks poised for a solid first half of 2019. NextEra Energy Inc. (NYSE: NEE) consists of two main business segments: the Florida Power & Light (FPL) regulated utility, and NextEra Energy Resources, a deregulated generator of predominantly wind, natural gas, nuclear and solar powered assets in North America. The company also holds a 65.1% share in the yieldco NextEra Energy Partners.

FPL recently announced a groundbreaking “30-by-30” plan to install more than 30 million solar panels by 2030 and make the state of Florida a world leader in the production of solar energy. It and NextEra Energy Resources are already the world’s largest producers of renewable energy from the wind and sun. When this plan is completed, FPL expects to be the largest utility owner and operator of solar in America.

Investors receive a 2.53% dividend. The RBC price objective was raised from $186 to $193 and compares with a $186.50 consensus figure. Shares closed at $176.09.

Sempra Energy

This top company rounds out the RBC Best Ideas list and is another solid defensive play. Sempra Energy (NYSE: SRE) is a natural gas transmission and distribution company headquartered in San Diego. Its California Utilities segment (South California Gas Company and San Diego Gas and Electric) distributes gas and electricity to approximately 25 million customers in Southern California. Other segments include SRE US Gas & Power and SRE International.

Sempra Energy replaced PG&E on the Dow Jones utility average prior to the open of trading last Friday. This will help the liquidity in the name as index buyers will need to add it.

Shareholders receive a 3.19% dividend. The RBC price objective was raised by a buck to $126, which is in line with the $126.60 consensus target. The stock was last seen at $112.67.

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These top dividend utility stocks should not be avoided because of a threat of rising interest rates, which actually look to stay range-bound this year. The 30-year Treasury yields only 3.09%, so these are much better investments now. For those worried about the stock market, it makes sense to move to these super-safe sector leaders.