Utility stocks had a great 2018 … for the most part. Yes, the Utilities Select Sector SPDR (XLU) broadly finished the year with a marginal gain. But mounting U.S. and global worries helped push the sector to a spectacular 20% run between the February lows and the mid-December highs.
Heading into 2019, it looks as though utility stocks could be among the better performers this year, too, according to Goldman Sachs analysts.
"For equity investors, risk is high and the margin of safety is low because stock valuations are elevated compared with history," Goldman Chief Equity Strategist David Kostin and team wrote in a Nov. 19 note to clients. "We forecast the S&P 500 index (.SPX) will generate a modest single-digit absolute return in 2019."
Although the bank believes cash is an excellent place to allocate some of your capital in the year ahead, when it comes to actual stock picks, utilities are high on its list – so much so that it raised the sector to "overweight." Why? Several analysts are predicting a slowdown in GDP growth in 2019, and historically, when that happens, utilities tend to outperform the markets as a whole, in part because the sector has traditionally had a low beta to the S&P 500.
Goldman also suggests that investors need to buy quality companies with stable earnings and revenues to prepare for the year ahead. Utilities fit that to a T, and typically deliver better-than-average dividend yield to boot. So with all that in mind, here are the 10 best utility stocks to buy for 2019.
Data is as of Jan. 21, 2019. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts' opinions provided by Wall Street Journal.
As investors get more defensive in 2019, NextEra Energy becomes an obvious choice.
One only needs to look at the company's stock chart in 2018 – or the past five years, for that matter – to understand that this $85 billion utility stock is as stable an investment as they come. The 2.5% yield doesn't hurt, either.
NextEra continues its push to become one of the country's greenest power producers. The company is committed to cutting its carbon emissions by 65% for a 20-year period starting with a 2001 base rate. Currently, NEE has the seventh-lowest CO2 emission rate among the top 50 power producers in the U.S.
The company's Energy Resources division generates 20 gigawatts of energy, 80% of it from wind and solar power, with the remainder from nuclear and natural gas.
If you're a socially responsible investor, this alone should make NextEra an attractive investment in 2019. But if you're purely interested in shareholder returns, NEE delivers there, too. The stock generated a total return of 162% over the five years ended Dec. 31, 2017 – significantly higher than the 108% total return of the S&P 500.
Most utilities of note are located in the U.S., but if you want a little bit of international diversification, National Grid is an excellent choice for this year.
The company operates utilities in upstate New York, Massachusetts, New Hampshire, Rhode Island and Vermont. Overseas, it runs both electricity and natural gas transmission businesses in the U.K.
In the six months ended Sept. 30, 2018, the company's U.K. businesses generated half its operating profit, while the U.S. contributed 38% and its NG Ventures business – which includes the company's real estate holdings and Europe's largest grain LNG storage facility – the remainder.
Also worth considering: National Grid announced the launch of a venture capital unit, National Grid Partners, which has committed $250 million over the next three years to invest in renewable energy innovation. NGP is the only global utility-backed venture capital company in Silicon Valley. The investments are intended to ensure National Grid stays ahead of the competition on the green-energy front.
Allentown, Pennsylvania-based PPL Corp. is another utility stock that offers geographic diversification. The company operates seven regulated utilities in Pennsylvania, Kentucky, and the U.K. Together, the three utilities provide electricity to 11.6 million customers.
While its U.K. business represents just 38% of PPL's base rate, it generates 53% of the company's profits. In fiscal 2017, the U.K. business brought in $2.1 billion in revenues and $652 million in earnings, making it the country's largest distributor of electricity.
PPL expects to spend $12 billion on its energy infrastructure over the next four years, which should increase the company's rate base from $27.3 billion in 2018 to $33.7 billion in 2022 – a compound annual growth rate of 5.4%.
Like NextEra, PPL is committed to reducing its carbon emissions. In 2010, PPL's utilities emitted 62.6 million metric tons of carbon into the air; by 2050, it expects to reduce that by 70% to 18.8 million metric tons.
PPL has paid 294 consecutive quarterly dividends and has hiked its annual payout for 19 straight years. Its goal is to increase the dividend by 5% to 6% annually – very nice considering that its 5.4% yield already is higher than most of its large-cap peers. And in 2019's investment environment, the extra yield is a wise choice.
New England residents likely are familiar with Eversource Energy, which operates regulated electric utilities in Massachusetts, Connecticut and New Hampshire. It also owns Aquarion Water Company, which provides water to customers in those three states; Eversource bought it for $1.7 billion in December 2017. All told, ES serves nearly 4 million customers in New England.
In the first nine months of 2018, Eversource produced $2.52 per share in profits on $801.7 million in revenues. It expects to report $3.20 to $3.30 per share for full-year 2018. And it estimates it will grow earnings per share by 5% to 7% in 2019.
Eversource plans to invest $6.5 billion in capital over the next three years to update its energy infrastructure; a majority of that will go to its electric transmission and distribution businesses.
ES also has taken care of its income-minded investors. The company has improved the payout by 8% compounded annually over the past eight years. It has paid out an average of 60% of its profits over this period, and should easily meet its objective of increasing the dividend by 5% to 7% annually, in line with its earnings growth. That payout also has fueled a 90.4% total return over the past five years through Oct. 31, 2018, that was more than six percentage points higher than its Edison Electric Institute (EEI) peers in the utility sector.
Fortis is a Canadian-based utility with operations in the U.S., Canada, and the Caribbean, serves 2 million electricity customers and 1.3 million natural gas customers. Its C$50 billion in assets generated C$8.3 billion in revenue in 2017, with C$1.1 billion in adjusted earnings.
While Fortis is based in St. John's, Newfoundland, it's focusing on the American market for its future growth. Between 2013 and 2016, FTS went on an acquisition spree in the U.S., buying Central Hudson Gas & Electric (New York state) for $1.5 billion in 2013, UNS Energy (Arizona) for $4.3 billion in 2014 and ITC Holdings (Michigan and six other states) for $11.3 billion in 2016.
In the first nine months of 2018 through Sept. 30, Fortis' U.S. assets accounted for 70% of its C$839 million in net earnings.
Fortis plans to spend C$17.3 billion on its energy infrastructure over the next five years, which will grow its rate base by 6% to 7% annually, allowing it to easily meet the company's target of 6% annual dividend growth. Fortis also has one of the oldest strings of dividend growth among the Canadian Dividend Aristocrats, at 45 consecutive years after its October hike.
Like most utilities on this list, Aqua America is growing by acquisition.
However, the water utility's most recent buy wasn't another water utility. Instead, it announced in late October that it would pay $4.3 billion to acquire Peoples Natural Gas, a Pittsburgh-based natural gas distribution company that serves 740,000 customers in Pennsylvania, West Virginia and Kentucky.
The combined entity will operate regulated utilities in 10 states, serve more than 5 million customers, have almost $11 billion in total assets, and boast a rate base of more than $7 billion, with 30% from natural gas and the rest from water. Aqua America expects its rate base to grow by 7% annually through 2021, while Peoples' rate base should increase by 8% to 10% annually over the same period.
Aqua America spent approximately $500 million in 2018 on its infrastructure and is expected to invest another $900 million over the next two years. Now, it has a second platform for growth. And it wouldn't be surprising if the acquisitive utility stock moved further into natural gas distribution in the future.
If you're looking for a small-cap utility play in 2019, look no further than Black Hills. Based in Rapid City, South Dakota, Black Hills provides electricity and natural gas to 1.25 million customers in eight states, from Montana in the north to Arkansas in the south.
In the nine months ended Sept. 30, Black Hills' gas utilities generated $116.2 million in operating income – down 5.3% from a year earlier – while its electric utilities saw a 15.6% decrease to $118.3 million. It also has small power generation and mining businesses that contributed $38.1 million and $12.6 million in operating income, respectively.
Although BKH's overall operating income was down 5.5% in the nine months, its net income was $171.9 million, 36% higher year-over-year due to Black Hills' lower tax rate in 2018.
Three of its natural gas utilities will get new, higher rates in the fourth quarter, which should lead it to finish 2018 with $3.35 in earnings per share. In 2019, Black Hills expects to earn at least $3.35 a share and $3.50 in 2020.
As far as dividends go, the company announced a 6.3% increase Nov. 5 that sees the annual rate rise to $2.02 – the company's 49th consecutive year of payout hikes.
Enbridge is another Canadian player on our list of top utility stocks to buy. Though it’s probably best-known as a pipeline company. With more than 17,000 miles of pipeline in North America, Enbridge moves 2.9 million barrels of oil daily through its Mainline and Express pipelines.
However, Enbridge also generates 1,750 megawatts of power through its wind, solar and geothermal projects. And it is Canada’s largest natural gas distribution provider with 3.7 million customers in Ontario, Quebec and New Brunswick, as well as New York state.
Enbridge is transitioning into a regulated pipeline and utility model with stable revenue and earnings. To achieve this goal, it spent 2018 disposing of non-core natural gas gathering and processing assets in both the U.S. and Canada, which collectively sold for C$5.9 billion. ENB also sold C$1.75 billion in renewable power assets in Canada and the U.S.
The company does plan to grow, too. Enbridge plans to spend C$22 billion on its energy infrastructure over the next three years. C$9 billion of that will go toward replacing its Line 3 pipeline that runs from Edmonton, Alberta, to Superior, Wisconsin. Completion is expected in the second half of 2019.
Berkshire Hathaway is the first of two recommendations that provide investors with extra diversification beyond the utilities sector.
As Goldman Sachs suggested in the intro, you want to own quality companies with stable earnings and revenues in 2019. What could be more stable than Warren Buffett's holding company?
Berkshire Hathaway's energy subsidiary, of which it holds a 90.2% interest, operates four regulated utilities that serve 4.9 million retail customers, owns two pipeline companies with 16,400 miles of pipe capable of moving 8.1 billion cubic feet of natural gas daily, and also has ownership stakes in several electricity businesses. And that's just in the U.S. It also operates electricity distribution and transmission businesses in Canada and the U.K.
In fiscal 2017, Berkshire Hathaway Energy's annual revenues were $18.9 billion, generating $2.1 billion in net profits for the parent.
What you might not know about Berkshire Hathaway's little energy company is that it also holds one of America's largest home sellers – HomeServices of America – which represented buyers and sellers in $127 billion worth of residential real estate transactions in 2017.
If you're looking for exposure to utility stocks without owning a pure play, Berkshire Hathaway is an excellent choice in 2019.
Brookfield Asset Management
Brookfield Asset Management is a Toronto-based global alternative asset manager with more than $300 billion in assets under management. It is our second of two diversification options.
You want to buy Brookfield for many of its assets, including its 29.6% stake in Brookfield Infrastructure Partners LP (BIP), an owner of quality infrastructure assets around the world. BIP favors assets that generate stable cash flows and require very little in the way of ongoing capital expenditures. And like its parent, Brookfield Infrastructure generally buys cheap assets out of favor, then finds ways to add value, selling it when prices for these kinds of assets get expensive.
One example of an asset that BIP likes is Enercare, a Toronto company that rents water heaters and HVAC units to residential and commercial customers. Brookfield Infrastructure announced the C$4.3 billion purchase in August 2018. Another example is Gas Natural Columbia. In 2018, BIP acquired majority control of the second-largest national gas distribution system in the South American country, which serves more than 2.9 million customers via more than 12,000 miles of pipeline.
In the first nine months of 2018 through Sept. 30, Brookfield Infrastructure's utilities segment generated funds from operations (FFO, an important metric of profitability for REITs and other types of businesses) of $438 million, or 59% of its total FFO.
BAM (1.4% yield) doesn't provide the same level of income as BIP (4.8%), but it does provide you with additional investments in private equity, real estate and other alternative assets, in addition to utilities and infrastructure.