The ancient Romans were a superstitious people, seeing ominous portents everywhere. It makes you wonder how they found the courage to even leave the house. This comes to mind as investors obsessively pore over the latest cryptic signals from the Federal Reserve.
In the wake of signs that inflation is rising in the U.S. economy, the president of the Federal Reserve Bank of Atlanta, Dennis Lockhart, was quoted on Tuesday as saying that "action could be taken" at the Fed's June policy meeting. And bam! Just like that, otherwise strong utility stocks got clobbered.
Interest rate fears had been building for days. Over the last five days, the Utilities Select Sector SPDR ETF (XLU) has fallen 1.66%.
But there's no rational reason right now to punish inherently strong utility stocks. Below, we examine one of the strongest. This dividend payer is a sensible long-term growth-and-income play in an impetuous market.
The dynamic investors now fear is simple to understand: As rates rise, utilities must pay higher costs on their loans for the capital expenditures that provide their future lifeblood. Moreover, higher rates make utility stocks less attractive, from a risk basis, when compared to interest-pegged income alternatives.
But here's what impulsive investors are forgetting: Energy prices are still historically low, economic growth is sluggish at best, wage gains have been meager and interest rates remain low. It all means that an outbreak of significant inflation is unlikely. This year, a cautious Fed is likely to raise rates slowly and incrementally, if at all. Let's look at our best-of-breed utility play.
NextEra Energy (NEE)
NextEra Energy is a major provider of "green" alternative energy with a generation capacity of about 46,400 megawatts. We especially like this utility's commitment to renewable energy, a growth opportunity that will continue to unfold for at least the next decade.
If you're still determined to worry about inflation and interest rates hikes, this should set your mind at ease: Since 1980, NextEra has never stuck investors with two consecutive years of losses.
About 60% of the company's earnings stem from regulated utility operations, with the rest from wholesale power generation, providing diversity that should buffer the stock from the ups and downs of the broader markets.
The company has a trailing 12-month (TTM) return on assets of 4.1% and a TTM return on equity of 15.2%, considerably higher than the industry average.
The stock boasts a dividend yield of 2.9%, with a six-year track record of rising dividends. NextEra's TTM price-to-earnings ratio stands at 20.1, not too pricey in light of the industry's TTM P/E of 18.05 and that of chief rival TECO Energy (TE) at 34.
NextEra's management recently lifted NextEra Energy's compounded annual growth rate for adjusted earnings per share from 6% to 8% through 2018 from 2014.
With the stock now trading at about $120.56, the median analyst one-year price target is $129, which suggests the stock can gain 7% over the next year. The highest price target from analysts is $144, which implies share price appreciation of 19%.
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