In these uncertain times, regulated utilities companies that pay consistent above-market dividends offer investors an excellent alternative to low-yielding call deposit bank accounts. Many companies in the sector operate stable businesses that provide essential services, helping them protect their profits and in turn their dividend payments.
While the group is not immune to declining commercial energy use and potential supply disruptions caused by the COVID-19 pandemic, record-low interest rates, along with growing residential demand, underpin intermediate earnings power. FactSet pegs its latest 2020 earnings estimate for the sector at $3.23 per share, down only slightly from $3.26 at the end of February, per Barron's.
Performance wise, the Utilities Select Sector SPDR ETF (XLU) – the group’s exchange-traded fund proxy – is trading 13.6% below its record Feb. 18 high. By comparison, the broad-based S&P 500 has fallen almost 18% over the same period. Let's examine three of the segment's better-known names and discuss possible trading tactics.
American Electric Power Company, Inc. (AEP)
American Electric Power Company, Inc. (AEP) generates, transmits, and distributes electricity to more than 5 million retail and wholesale customers in 11 states. KeyBanc analyst Sophie Karp upgraded the utility to "overweight" from "sector weight" last month, saying that the declining cost of debt, fuel, and taxes should allow the company to invest in upgrades, helping to add shareholder value. As of April 13, 2020, American Electric stock has a market capitalization of $42.71 billion, offers a healthy 3.24% dividend yield, and is trading 8% lower year to date (YTD).
Despite the looming formation of a bearish "death cross" – when the 50-day simple moving average (SMA) crosses below the 200-day SMA – American Electric shares look to be trying to break out above the top trendline of an ascending triangle. If the stock closes above this level, traders should anticipate a move to $103, where price may find resistance from the January/February swing high. Those who take a trade should keep a stop-loss order somewhere below the triangle's upper trendline.
FirstEnergy Corp. (FE)
With a market value of $24.24 billion, FirstEnergy Corp. (FE) distributes electricity in the United States, operating through two business segments: Regulated Distribution and Regulated Transmission. Two-thirds of the Ohio-based energy provider's customers are residential, helping insulate the company against falling commercial sales while also benefiting as more people work from home. Investment bank Morgan Stanley expects overall residential volume to increase by 2% this year. FirstEnergy stock offers a 3.49% dividend yield and has fallen 7.12% YTD as of April 13, 2020.
Since the moving average convergence divergence (MACD) line crossed above its trigger line in late March to generate a buy signal, the stock has continued to charge higher. Furthermore, given that the relative strength index (RSI) sits well below overbought levels, the price has ample to keep up the bullish momentum before consolidating. Active traders should think about booking profits near the all-time high at $52.52 and placing a stop at the mid-point of last Thursday's wide-ranging day.
Dominion Energy, Inc. (D)
Dominion Energy, Inc. (D) produces and transmits electricity and natural gas in Virginia and the Carolinas, serving both commercial and residential customers. PGIM Jennison Utility Fund manager Bobby Edemeka argues that the firm is well positioned defensively, given that 80% of its revenues come from gas utilities that are reserving capacity on its pipelines, rather than other gas producers, per the previously cited Barron's story. Trading at $81.59 with a market capitalization $68.37 billion and issuing a 4.61% dividend yield, Dominion Energy stock is trading essentially flat on the year, outperforming the diversified utilities industry average over the same period by 10.42% as of April 13, 2020.
The utility's share price has formed an inverse head and shoulders pattern over the past month, with the bottoming pattern's head finding strong support near the early 2019 swing low. Friday's close above the formation's neckline and 200-day SMA may act as a catalyst for further buying in the week ahead. Those who buy here should set a take-profit order near the February/March twin peaks around $89.15 but cut losses if the stock fails to hold above $77.50.