- “gas And Electric Utilities’ Transition To A Low-carbon Future”
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“gas And Electric Utilities’ Transition To A Low-carbon Future” – Sector investing offers targeted opportunities in the stocks of companies in specific segments of the economy. The utilities sector includes companies such as electric, gas or water utilities, or those that act as producers or distributors of power.
As of July 2022, the sector had a market capitalization of over $1.58 trillion. Although utilities are private, for-profit companies, they are part of the public service infrastructure and are heavily regulated. Those who include utilities in their portfolios hold them as long-term investments and often use them to generate income through dividends.
“gas And Electric Utilities’ Transition To A Low-carbon Future”
Utilities include large companies that offer multiple services such as electricity and natural gas or specialize in only one type of service, such as water. Some utilities rely on clean and renewable energy sources such as wind turbines and solar panels to produce electricity.
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Utilities typically offer investors stable and consistent dividends, coupled with less price volatility relative to the general stock markets. As a result, utilities tend to perform well during recessions and economic downturns. Conversely, utility stocks tend to underperform the market during times of economic growth.
Utilities require a significant amount of expensive infrastructure and therefore carry large amounts of debt on their balance sheets. These debt burdens make utilities hypersensitive to changes in the market interest rate. And because utilities are capital intensive, they require a continuous inflow of funds to finance infrastructure upgrades and new asset purchases.
In July 2022, higher inflation raised new challenges for utilities. During the inflation of the 1970s and 80s, utilities faced large debt, rising fuel costs, blackouts, increased regulation, and bankruptcies. Utilities that make it through economic challenges are likely to continue to rank among the best investments for security, generous income and lasting wealth.
Because utility stocks pay reliable dividends, investors often prefer them over lower dividend paying stocks. After the financial crisis, the Federal Reserve cut interest rates to stimulate the economy. As a result, investors have flocked to utilities, as safer investments such as utility companies are a viable defensive option for investors during macroeconomic downturns.
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If interest rates rise, investors may find higher-yielding alternatives than utilities. When a utility pays a dividend yield of 3% but increases in interest rates increase Treasury bond yields to 4%, the utility company should increase its dividend payout to match the rising yields.
In addition to investing in the individual stocks of utility companies, investors can also buy regional utilities or invest in exchange-traded funds (ETFs) or sector funds containing a basket of utility stocks from companies located throughout the United States.
The Fidelity Select Utilities Portfolio (FSUTX) includes the holdings of 29 utility companies as of March 2022 and an annual dividend yield of 1.52%. The Utilities Select Sector SPDR Fund (XLU) is one of the largest utilities sector funds, with $15.5 billion in net assets, and is one of the most actively traded utilities ETFs, with more than 18 million shares traded daily. The fund typically pays a dividend yield of around 3%.
The dividend yield of the XLU exceeds the yield of the S&P 500 stock ETF, SPDR S&P 500 Trust ETF (SPY), which as of July 2022 is paying around 1.56%.
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Utilities are stable investments that typically provide a regular dividend to shareholders, making them a popular long-term buy-and-hold option. Dividend yields on utility stocks tend to be higher than those paid by other stocks.
During times of economic downturns with low interest rates, utilities become attractive. They exhibit lower volatility and provide a desirable source of predictable investment returns from the dividends they pay on their shares.
Utilities, however, face intense regulatory oversight and require expensive infrastructure that needs routine updating and maintenance. To meet these infrastructure needs, utility companies often float debt products which, in turn, increase their debt burdens. This debt also makes these services particularly sensitive to interest rate risk. If rates rise, the company must offer higher yields to attract bond investors.
The utility sector consists of companies that provide electricity, natural gas, water, sewage, and other services to homes and businesses. Public utilities are privately owned companies that are regulated by public utilities commissions that operate at a variety of jurisdictional levels, usually at the state level.
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These commissions are overseen by the National Association of Regulatory Utility Commissioners. NARUC members are responsible for ensuring reliable utility at fair and reasonable rates. In 2022, utility companies in the United States with strong investment interest included:
In 2020, President Joe Biden called for the country to achieve a 100% clean energy economy and net-zero greenhouse gas emissions no later than 2050, making nearly $2 trillion in investment to achieve this goal. The energy and utility industry has an opportunity to advance its grid modernization and clean energy efforts by tapping into funds allocated in the Infrastructure Investment and Jobs Act which includes $65 billion earmarked for upgrading the national power infrastructure.
An industry outlook report by Deloitte (2022) identified five trends for the utility industry that include increased competition, expansions in infrastructure, greater electrification of transportation, an emphasis on disaster preparedness, and traditional energy players entering the renewable energy field.
According to Fidelity sector portfolio manager Douglas Simmons, utilities fundamentals in 2022 look very strong overall, driven by the continued shift to renewable energy sources and away from fossil fuels.
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Utilities remain wary of regulations that may force the closing of power plants, although the sector has largely supported the tax breaks proposed in a bill called Build Back Better, which aimed to provide more than $300 billion in direct subsidies for wind, solar, transmission, storage. , carbon capture, and nuclear projects. Build Back Better failed to pass the Senate and was replaced by the Inflation Reduction Act (IRA), which was signed into law in August 2022. The IRA appropriates $369 billion for climate and clean energy initiatives, including tax incentives that should reduce the costs of the renewable energy transition for utility companies.
According to Morgan Stanley, renewable energy resources will grow from 12% of the US energy mix starting in 2021 to 39% by 2030.
Public utilities are regulated by the government or state under the National Association of Regulatory Utility Commissioners and often supply electricity, gas or water to a region or area.
Globally, the largest utility is NextEra Energy, a provider of electricity-related services and a market capitalization of $158B in July 2022. Its main subsidiary, FPL, is a rate-regulated utility engaged primarily in the generation, transmission, distribution, and sale of electric power. energy
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The utilities sector is an industrial category of stocks, consisting of companies that provide basic daily amenities, including natural gas, electricity, water, and power. Typically, investors buy utilities as long-term assets. These stocks typically feature stable prices and good dividend income. The move to “clean” energy, along with competitive legislation and a presidential administration dedicated to renewable energy resources, some financial analysts predict strong growth for the services sector in the 2020s.
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