7 Safe-Haven Utilities for a Coronavirus Bear Market

While no sector has been completely immune from the Covid-19 bear market selling, utilities are still considered a safe haven relative to most market sectors. Here, several leading research analysts and newsletter advisors -- and contributors to MoneyShow.com -- review some favorites in the utility space. Roger Conrad, Conrad's Utility Investor The big questions for investors: Where will the blows from Covid-19 hit hardest and what if anything will be spared? For utilities and essential services stocks, it's basically a split decision as far as where they'll come out in all of this. Are they safe havens that will weather Covid-19 and the resulting economic fallout, as almost all of them did the Financial Crisis of 2008-09? Or will their earnings wilt under mounting economic pressure? I've raised my buy target on Southern Company to $60. That follows the company's strong fourth-quarter numbers and more importantly management's positive guidance for the Vogtle nuclear construction project. There are still hills to climb for Vogtle to enter service before the respective deadlines of November 2021 and November 2022 for Units 3 and 4. And Southern's industrial sales are likely to take another hit this year from the impact of Covid-19. So no one should throw caution to the winds. But after the successful sale of assets related to the Atlantic Coast Pipeline, Southern will no longer need to issue equity the next five years, other than through its DRIP (dividend reinvestment plan). And there's a reasonable possibility the company will complete the project six months early, therefore getting the benefits of its revised deal with its partners. That's good reason to buy at $60 or less. Our Conservative Holdings are certainly safe enough for anyone to buy and hold now. Two electric utilities make that list: Edison International and Exelon Corp. . Edison took a dive despite announcing generally solid fourth-quarter results and guidance. The likely reason is concern about wildfire-related costs, which came in higher than expected. But the basic case here is the same: A clear path to mid-to-upper single-digit earnings growth long-term as the utility invests with regulators' approval in California's aggressive energy plans. Buy Edison up to $75. Exelon shares have been volatile since the company announced federal officials are still investigating its lobbying efforts in the Illinois legislature last month. And Federal Energy Regulatory Commission efforts to intervene on behalf of fossil fuel generators threaten to disrupt the wholesale electricity markets where it operates. But the $26 billion regulated utilities CAPEX plan from 2019-2023 is still on track, as is the primary financing method of using free cash flow generated by the company's unregulated nuclear power fleet. That means the investment case is intact, as Illinois prepares to pass pro-nuclear legislation and other states challenge FERC's recent orders, including potentially leaving the Regional Transmission Operator. Exelon remains a buy up to $48. Shares of gas distribution utility South Jersey Industries have also retreated since announcing fourth-quarter earnings that were on the high end of expectations. Management's 2020 guidance continues to be a robust $1.50 to $1.60 per share, even under very conservative assumptions for the stalled PennEast Pipeline. And the company has set a favorable outlook for opportunity under New Jersey's aggressive energy plans. Trading under 18 times expected 2020 earnings, the company is a takeover target and buy up to $32. Christopher Muir, CFRA Research Our latest focus stock is Sempra Energy , which carries CFRA's highest recommendation of 5-STARS, or Strong Buy. Sempra Energy is a utility holding company with 88% of its 2019 sales in the U.S. and 12% in Mexico. The company operates five segments: SDG&E, SoCalGas (SCG), Sempra Texas Utilities, Sempra Mexico, and Sempra LNG. SDGE's service area includes 4,100 square miles from Orange County to the Mexican border. SDGE serves 1.47 million electric customers within a population of 3.7 million and 895,000 natural gas customers within a population of 3.4 million. SCG's service area includes 24,000 square miles of Central and Southern California, covering 6.03 million natural gas customers with a population of 22.0 million. Sempra Texas Utilities owns an 80.25% interest in Oncor Holdings. Sempra LNG provides natural gas marketing, trading, and risk management services and sells electricity. Sempra Mexico, which includes IEnova, develops, owns, and operates, or holds interests in, energy infrastructure in Mexico in two key energy markets: gas and power. IEnova's gas business offers pipeline services for natural gas, LPG and ethane, as well as storage for LNG and LPG, and distribution of natural gas. IEnova is constructing marine and land terminals for the receipt, storage, and delivery of liquid fuels. In its power business, IEnova operates a natural-gas fired combined-cycle plant and wind and solar power plants and is constructing additional wind and solar power plants. Sempra Energy owns 66.6% of IEnova as of December 31, 2019, and the remaining shares trade on the Mexican Stock Exchange. Our Strong Buy opinion reflects our view of strong EPS growth driven by new projects entering service and its discount to peer's valuation. SRE's utility segment has various projects in development that should add to its rate base. Also, it has filed for rate increases covering the period from 2019 through 2022. We see the startup in 2019 and 2020 of the Cameron LNG export project boosting EPS. Activist investor interest has led SRE's board to change its makeup and initiate strategic reviews. Thus, SRE has sold its U.S. renewables business and two natural gas storage assets and announced agreements to sell its international utilities in Chile and Peru. Our 12-month target price of $140 is 20.4x our 2020 EPS estimate, or a premium to peers, warranted by prospects for an above-peer three-year EPS growth rate. Risks to our recommendation and 12-month target price include unfavorable regulatory decisions and weaker economic conditions. Jimmy Mengel, The Crow's Nest Avoiding panic is one reason I focus mostly on long-term dividend stocks. These stocks will anchor your portfolio for years to come. They'll be there when you need them. So please, do not panic. Selling now would be like dumping precious cargo overboard in the middle of the storm. Once the squalls stop and the hurricane subsides, you'll be left sitting with an empty boat. This too shall pass. One of my favorite dividend reinvestment (DRIP) position is Aqua America, which was just renamed Essential Utilities . This is the second-largest publicly-traded water utility based in the U.S., and serves more than 3 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana, and Virginia. Last year the company invested nearly $60 million acquiring eight water and wastewater systems, which added approximately 12,000 new customers to its books. Essential has also signed three purchase agreements for other municipal wastewater acquisitions. In total, these acquisitions will serve more than 200,000 customers. It has just announced its 28th dividend increase in the past 29 years. Even more impressive, Aqua America had paid a consecutive quarterly cash dividend for more than 74 years. It currently yields 2.34%. Essential Utilities will also give you a 5% discount if you buy the stock directly through their DRIP. Utilities always stay strong during times of trouble. Regardless of what is happening in the markets, people still pay their electric and water bills above all else. These companies also tend to be de facto monopolies. Jacob Kilstein, Argus Research We are raising our rating on FirstEnergy Corp. , a diversified energy company based in Ohio, to buy from hold. Our upgrade reflects the stock's favorable valuation and our view that the coronavirus will increase investor interest in utility stocks. We are setting a target price of $44. As more people work at home (and spend more leisure time at home) due to the pandemic, we expect demand for electricity and gas to remain constant or grow on the residential side, but to decrease on the industrial side. We believe that investors will gravitate to high-yield stocks such as utilities as the Fed lowers interest rates. Over the past five years, FE shares have shown a strong inverse correlation to the 10-year Treasury yield, so that when interest rates rise, FE shares tend to fall. The company recently raised its quarterly dividend by 2.6% to $0.39 per share. The increase was the second in 2019. FE had previously not raised its dividend since 2014, when it reduced its quarterly payout by 35% to $0.36. The shares trade at a discount to the peer group, which we think is no longer warranted given the company's cost cutting and long-term emphasis on cash flow growth. Management is working to transform the company into a regulated utility, which should provide more stable earnings and cash flow. Charles Jones has served as president and CEO since January 2015. He was previously executive vice president and president of FE's utilities group. In the wake of the 2014 dividend cut, FE revised its strategy to focus on its regulated distribution and transmission businesses -- which provide more predictable growth with less overall risk. Management expects these businesses to account for 80% of EPS in future years. It expects to invest heavily in its regulated operations, with a focus on improving reliability. Risks to utilities include commodity price fluctuations, the effects of adverse weather on revenues, regulatory issues (especially construction-cost recovery), and potential environmental and safety liabilities. In addition, the capital-intensive nature of the utility industry creates ongoing liquidity risk. Lastly, the bankruptcy filing of the FirstEnergy Solutions subsidiary may have a negative impact on the financial health of the consolidated company. FirstEnergy shares appear favorably valued at current prices near $39. Over the past 52 weeks, the shares have traded between $36 and $49. On a fundamental basis, FE trades at 15.4-times our 2020 non-GAAP EPS estimate, near the midpoint of its five-year historical range of 10.1-20.9 (the P/E was toward the top of the range before the coronavirus selloff), but below the peer median of 16.6. We think the discount is no longer appropriate given the company's recent dividend hikes and emphasis on cash flow improvement. In addition, in a lower interest rate environment, we think that investors will gravitate to high-yield stocks such as utilities. The current yield of about 4.0% is above the peer median of 3.8%. Our target price of $44 implies a projected 2020 P/E of 17.6, slightly above the peer average.

7 Safe-Haven Utilities for a Coronavirus Bear Market

While no stocks are completely immune from Covid-19 selling, utilities are still considered a safe haven relative to most market sectors.

Columnist Conversation

Mr. Buffett Said: 'I couldn't find anything worth buying'

Thoughts on Stocks, Credit and the Reopening

Large CEO Buy Last Week in Essent Group (ESNT)

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.