The utilities sector faced significant challenges in 2023, causing a decline of over 10%. However, Barclays analyst Nicholas Campanella believes that the sector is poised for a strong comeback in 2024. In this article, we’ll explore the factors behind Barclays’ bullish outlook for utilities in the new year.
A Challenging Year for Utilities
The utilities sector, traditionally favored by income investors for its stable dividend payments, had a tough year in 2023. One of the primary culprits was the Federal Reserve’s rate-hiking policy, which increased refinancing costs for utilities. Rising interest rates also made utilities’ dividend payments less appealing compared to the risk-free yields offered by Treasury bondsUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil... More.
Utilities: Priced to Move
According to Barclays’ Nicholas Campanella, utilities are currently attractively priced, presenting an excellent entry point for investors. The sector’s poor performance in 2023, coupled with a narrative of declining capital costs, sets the stage for utilities to shine in the first half of 2024.
Factors in Favor of Utilities
Several factors contribute to Barclays’ optimism regarding the utilities sector:
a. Declining Cost of Capital: The Federal Reserve’s anticipation of three rate cuts in 2024 is expected to lower the cost of capital for utilities. This development is crucial for a sector that has struggled with negative earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... (EPS) revisions due to fluctuating interest rates.
b. Rising Electrical Demand: The utilities sector is expected to benefit from an increase in electrical demand driven by various factors, including the growth of data centers, onshoring of industrial services, and the rise of electric vehicles (EVs).
c. Transmission Companies’ Prospects: Companies like American Electric Power and Dominion Energy are set to gain from higher load forecasts and the expansion of offshore wind connections.
Risks to Consider
Despite the positive outlook, there are still risks associated with the utilities sector. State elections, for instance, can bring consumers’ bills into focus. Utilities often need to undergo a regulatory process, known as a rate case, to raise prices.
Barclays’ Upgraded Rating on Evergy
Barclays recently upgraded its rating on Evergy to overweight from equal weight. This decision was driven by the resolution of a significant headwind: Evergy’s rate case in Kansas. In November, Evergy reached an agreement with Kansas regulators, resulting in a 3.54% rate increase for customers in the eastern part of the state. However, customers in the Kansas City metro area will experience a rate decrease of approximately 4.53%.
Despite these positive developments, Evergy’s stock currently trades at a ~12% discount compared to its large-cap peers. The company offers a dividend yield of 4.8%, although six out of nine analysts covering the stock rate it as a hold.
Bottom-line: Barclays’ bullish outlook for the utilities sector in 2024 is based on various factors, including an attractive entry point for investors, a declining cost of capital, and increasing electrical demand. While risks remain, the sector appears poised for a rebound after a challenging 2023. Evergy’s recent rate case resolution also adds to the positive sentiment within the sector, making it an interesting space to watch in the coming year.
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This content is provided for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor.
