With the Federal Reserve having already cut interest rates twice this year, utility stocks—considered defensive dividend-income investments—have soared as the group tends to outperform in a low interest rate environment.
The sector’s main ETF, the Utilities Select Sector SPDR Fund (XLU), was the market’s top sector performer in the third quarter, gaining 11% and outpacing the S&P 500’s 8% increase over the same timeframe. The ETF is up 21% since the start of the year.
NextEra Energy (NYSE:NEE), the largest electric utility holding company by market capitalization, reported better-than-expected third-quarter results on Tuesday, Oct. 22, sending its shares soaring to a fresh all-time high. We highlighted NextEra in last week's post as a utility stock to watch.
Delving deeper into the sector, here are three stocks with strong upside potential to consider ahead of their quarterly earnings reports.
1. Duke Energy
As one of the largest electric and natural gas utilities in the U.S., Duke Energy (NYSE:DUK) provides electricity to almost eight million retail customers in six states across the Southeast and Midwest regions.
Shares of the Charlotte, North Carolina-based corporation ended at $95.32 on Tuesday, not far from their recent 52-week high of $97.37 reached on Oct. 4, giving it a market cap of roughly $69.5 billion.
Duke Energy next reports earnings before the U.S. market opens on Nov. 8. Consensus calls for earnings per share (EPS) of $1.69 for the third quarter, up from EPS of $1.65 in the same period a year earlier. Revenue is forecast to rise almost 8% YoY to $7.13 billion.
The stock surged around 10.5% so far in 2019, as investors flock to the attractive dividend yield in the face of falling interest rates. The corporation now has one of the highest yields in the sector after it recently increased its quarterly cash dividend by almost 2% to $0.945 per share. This represents an annualized dividend of $3.78 and a yield of 3.96%.
2. Southern Company
The second largest utility provider in the U.S. in terms of customer base is Southern Company (NYSE:SO). Through its subsidiaries, it serves nine million gas and electric utility customers in six states across the southern U.S.
Shares, which are up around 40% year-to-date, closed at $61.44 yesterday, not far from a record high of $62.36 touched on Sep. 24. At current levels, the Atlanta, Georgia-based giant has a valuation of roughly $64.2 billion.
Third-quarter earnings are scheduled to be released on Oct. 30 ahead of market open. Consensus calls for EPS of $1.16, up from earnings of $1.14 per share in the year-ago period. Revenue is forecast to total $6.19 billion, compared to sales of $6.16 billion in the same quarter a year earlier.
The stock’s hefty dividend payout and attractive yield make Southern an even likelier candidate to outperform in the months ahead. The company currently offers a quarterly dividend of $0.62 per share. This represents an annualized dividend of $2.48 and a yield of 4.06%.
3. Dominion Energy
Dominion Energy (NYSE:D) is a power and energy supplier serving more than five million retail energy customers in seven states across the Midwest, mid-Atlantic and Northeast regions of the U.S.
Shares are up nearly 16% since January 1, reaching a fresh 52-week high of $83.23 yesterday, before closing at $82.82. The market cap is currently $66.5 billion.
The Richmond, Virginia-based company, is expected to publish third-quarter earnings ahead of the market open on November 1. Consensus estimates call for the utility provider to post earnings of $1.14 per share, down a penny from EPS of $1.15 in the year-ago period. Revenue, however, is forecast to grow a whopping 30% from the same quarter a year earlier to $4.48 billion.
In February, Dominion declared that it was increasing its quarterly cash dividend by almost 10% to $0.9175 per share. This represents an annualized dividend of $3.67 and a yield of 4.47%, making it an extremely attractive play at a time of declining rates.